Recent IMA statistics show an encouraging growth in retail sales of investment funds. It appears that the investment management industry can look forward to some semblance of an Isa season after three years of downbeat sales. The statistics also identified trends in the market, showing a conservative and risk-averse investor, who is still unwilling to gamble on the more exotic. Is this experience universal? Or have any fund management groups spotted other, more surprising, trends in the market? In December, net retail sales of investment funds were up to £833.5m, from £270.9m in December 2002. This was an impressive rise, undoubtedly buoyed by the fact that the luckier investors are now finding that their investment has grown over the past three years. Retail repurchases were marginally up on last year, but still down on November, demonstrating an encouraging trend that fewer investors are giving up on the equity markets. But this success was concentrated in only a few sectors; by and large, investors are still taking a conservative approach. On the plus side, this means that they aren’t chasing performance – if that had been the case, smaller companies would have put in a more impressive performance instead of languishing at the bottom of the tables. Equally, corporate bond funds would not be one of the top-selling sectors, having performed poorly relative both to equities and to previous years. Ian Chimes, managing director of Credit Suisse Asset Management, finds that his own experience has been largely the same: “It is now coming down to the long-term committed investors. We have lost a lot on the way and some are gone forever. The pain of the technology bubble has beaten them. Now we have people who know that over the long term equities are a good bet, but don’t quite trust the rally. If they have £20,000 to invest, they might put in only £5,000.” Chimes (pictured left) says investors split into two camps. The first, as the IMA statistics bear out, are the “safety first” investors. Income funds are proving very popular because they are based in the UK and because they provide dividends. But Chimes says that the statistics do not reflect the other camp, which includes investors who want a bit more spice. There is a lot of interest in the Far East, dynamic funds and emerging markets. Chimes says: “These are people who hold some equities and if they are going to put more money in, they want it to be in something racier. Hence you are starting to see good sales statistics for the Far East. A huge amount of money is going into focus funds, like those from Gartmore or Schroders. If the market is going to rise by, say, 8%, these people want a good stockpicker who can give them 12%.” Paul Feeney, head of UK retail at Gartmore, also sees this polarisation: “We are seeing money going in at the cautious end, like Chris Burvill’s Cautious Managed fund. Then there are the higher alpha areas, such as our focus range or our China and emerging markets funds.” It is the middle ground that is losing out, and Chimes says that Europe is the sector left on the shelf this year. Again, this is borne out by the statistics, which show Europe as one of the worst-selling sectors, with only the very strongest European funds managing to attract some of the limited pool of investor cash. Nick Wells, marketing and communications director at Artemis, says his firm has been seeing as much money coming into Philip Wolstencroft’s European fund as it has into Adrian Frost’s Income fund: “I have a gut feeling that those coming into the European fund are seasoned investors who are taking a longer-term view.” The Far East is attracting a lot of interest, despite fears over a “bubble” in China. However, as Ken Edwards, sales and marketing director at Baillie Gifford, points out, this increase in interest is coming from a very low level. Investors are being lured back in after a year of strong returns in the region, and it is a similar picture with Japan. Edwards says he has seen increased inflows and enquiries about Japan, following a rebound in the market last year. But, as with Asia ex Japan, he believes this is simply investors bringing their allocation back up to neutral from previous low levels. But what about funds that no-one is interested in? Smaller companies have not attracted any interest this year. Knowledgeable investors are avoiding the sector because of its strong run last year, believing that it cannot possibly replicate the success in 2004. Others are still too risk-averse to invest. Gartmore’s Feeney (pictured above) says: “Our smaller-cap managers, Gervais Williams and Rob Smith, have had a terrific year, yet we are not seeing the flows into those funds that I would expect.” And what is the general “feel” of the market? Most fund management groups are cautiously positive about the prospects for this year. Chimes says: “This is not a bright new dawn, but this quarter’s figures should be pretty good. We are much, much more optimistic than in the middle of last year. Never underestimate the value of looking at a fund that’s gone up. People are feeling much more positive. But it doesn’t feel like a bubble. The froth has gone.” Edwards says that Baillie Gifford has seen its levels of telephone enquiries and requests for literature steadily climb upwards since last autumn. He adds: “It is not the year 2000, but it is certainly on an upward trend. There has been a steady, consistent increase in flows. It may not be huge, but it’s very encouraging.” Things are certainly looking up for investment management firms, but as yet it is confined to certain areas. With certain exceptions, it is still proving difficult to get investors interested in middle-tier investments – most notably smaller companies, but also Europe and Japan. They want safe or they want racy, so it is likely to be an unusual year, especially as the performance-chasing that has typified previous years is not as prevalent. But after the past three years, it is likely that fund management groups are grateful that investors are finally getting their wallets out again.