Nervous investors withdrew more cash from funds in the three months to the end of September than in any other quarter in the past 10 years, data from Morningstar Direct reveals.
A net £8.85 billion was taken out of funds in total in the third quarter of 2018, almost three times more than the £3 billion pulled in the first quarter of 2016.
If outflows continue at the same pace through Q4, 2018 could be the third worst for UK open-end funds since 2009, though flows will still be positive over the year.
Since Q4 2008, only three other quarterly periods – Q2 2015 at £1.1 billion, Q2 2016 with outflows of £83 million, and Q3 2016 at £1.5 billion – have seen negative flows.
While equity-focused funds across the piste saw outflows of £3.67 million, four Investment Association sectors with differing remits fared worst. The IA Targeted Absolute Return sector saw outflows of £3.7 billion, with the Morningstar Bronze Rated Standard Life Investments GARS Strategies fund continuing to haemorrhage cash.
Meanwhile, Sterling Strategic Bond funds saw £1.8 billion in redemptions, the bulk of which came from the Silver Rated Jupiter Strategic Bond fund. Investors continued to shun UK stocks, pulling £1.3 billion from UK All Company offerings, while European mandates, down £1 billion, also suffered.
Global Emerging Markets funds £700 million of outflows was more than any quarter in the past 10 years.
Global funds have had two successive quarters of smaller net inflows, with Q3 amounting to £550 million, while the Mixed Investment 40-85% Shares sector seeing its best three months since Q4 2017 as those still keen to back equities dial down their risk exposure.
Investors in exchange traded funds went bearish months ago, as we noted in May with €4 billion pulled from ETFs in March and April combined. Still, the second quarter of 2018 saw €4.35 billion of net inflows into ETFs in total, while Q3’s total stood at 11.3 billion.
Are Investors Right To Go Risk-Off?
The current bull run is the longest on record. That’s despite the sharp pull back seen between 9 October and 11 October, which saw the S&P 500 fall over 150 points, or around 6%.
Some think this is the beginning of the end for the bull market, and we’ll imminently slip into a rout. But many naysayers said the same in February, when the S&P 500 dropped almost 300 points, or 10%, albeit over the space of a fortnight rather than two days.
The mindset of retail investors has not been helped by some noting that two of the most recent big market crashes in 1987 and 2008 occurred in October. As Christoph Ohme, portfolio manager for German equities at DWS, notes, while October is generally a good month for stock market returns, volatility is higher than any other month.
Still, the blue-chip US index bounced back over 3% the weekend, though is now below that level. What’s clear is that stock market volatility is back, which could be a cause for concern for risk assets. But long-term investors will cheer and reinforce that the ups and downs of the stock market is nothing to fear.
Indeed, in respect to stocks, most analysts are remaining bullish. Mark Dowding, co-head of developed markets at BlueBay Asset Management, says that policy remains accommodative and inflation benign, suggesting now may be the wrong time to become too bearish on stocks.
That is echoed by Mark Haefele, chief investment officer at UBS Wealth Management, who urges clients to stick with stocks. “Investors now have more choice in their search for real returns, but we think it is still too early to go underweight equities in portfolios,” he writes.
In particular, he notes that the US economy still looks in good shape, valuations are attractive in Europe and China has been oversold. “While a time to overweight bonds relative to stocks comes in every cycle, we don’t think it is here yet.”
Dowding adds that investors should embrace volatility: “At a time when markets have shredded investors’ returns… this is still time to be on the front foot.”
