Investors have pulled back from the heavy selling of open-ended funds that marked the start of the year but are playing it safe with lower-risk assets, such as bonds.
Investors have been in selling mode since the 2016 UK referendum on EU membership but are showing signs of a switch in sentiment, according to new figures from data company Morningstar. The data suggest a marked slowdown in the sell-off triggered by the Brexit vote and stock market volatility over the past two years.
Less than £500m flowed out of UK-domiciled open-ended funds in May, according to Morningstar, compared with outflows of more than £5bn in the first two months of the year driven by stock market volatility, trade tensions and Brexit-related fears.
Morningstar defines all funds as long-term apart from those invested in money markets — short-term loans between banks and institutions — and says it has seen investors slow down their sales of equities and pile into fixed income in recent weeks.
In January, it said, long-term funds experienced outflows of £5.8bn, followed by £5.4bn in March. A smaller outflow from equity funds explained the slowdown in the most recent months, with only £640m flowing out of equity funds in May. Over the whole year about £20.6bn has left the door, according to Morningstar.
“Trade tensions had a big role to play in volatility at the start of the year and made investors more cautious,” said Bhavik Parekh, analyst at Morningstar. “Although funds are still seeing outflows, the pace is now slowing.”
The research mirrors findings by the Investment Association last month, which published its own data on open-ended funds bought by UK investors in April 2019. The IA includes funds domiciled in other locations such as Luxembourg and Guernsey, a wider sample than Morningstar’s.
It said customers had returned to “business as usual” in Isa season, with retail fund sales clearing £2bn in April 2019 — the first time they had done so since April last year.
Its own figures showed investors had bought more funds than they sold for the first time in six months, following months of heavy outflows, after investors went back to investing during peak Isa season.
According to Morningstar’s research, investors have been buying into bond funds and money market funds. “Investors tend to buy fixed income funds when they are more nervous and trying to minimise risk,” said Mr Parekh.
Morningstar’s findings reveal net inflows to fixed income funds of £712m in May this year. Over 12 months such funds have still experienced outflows amounting to £1.2bn, however.
The IA research found customers had been flocking into fixed income funds in April 2019, investing £1.6bn across fixed income funds of all domiciles.
Chris Cummings, chief executive of IA, said: “Bonds fared particularly well again, a sign that investors are managing their portfolio risk.” He added that investors were also buying into mixed asset and global equity funds — demonstrating “a continued appetite for diversification”.
But investors have fled total and absolute return funds, according to Morningstar’s research. Though once touted as the perfect way for retail investors to reduce risk and replicate successful hedge fund strategies, funds such as Standard Life Aberdeen’s Global Absolute Return Strategies have suffered large outflows in recent years.
Emerging markets funds have also suffered in recent months due to dollar strength and trade tensions with China. Morningstar data showed £523m flowed out of UK-domiciled emerging markets funds in May, with more than one-third of that attributable to a single fund, Schroder Global Emerging Markets.
Some funds attracted notable inflows during the past month, however, including Hargreaves Lansdown’s new in-house fund, the Select Global Growth Shares fund. The fund was launched in May and attracted £318m in its first month, according to Morningstar.