Earlier in the week, Larry Fink, chief executive of BlackRock, the world’s largest asset manager, said the biggest fear for investors was their being under-invested, as equity funds continue to see net outflows.
Indeed, in the first quarter of 2019, despite the average fund in all Investment Association sectors giving positive returns, UK retail investors withdrew £2.3 billion from equity funds during the period. Despite February being net positive for equity-related fund flows, we’ve now seen four straight quarters of net outflows totalling £11.8 billion.
In contrast, fixed income funds have seen net inflows of almost £900 million during that 12-month period. Even money market funds, which essentially invest in cash and/or short-term debt, have seen £1.7 billion of inflows, as investors rotate into safe-haven areas to catch their breath and re-allocate their portfolios.
Below, we review the five funds with most net inflows, according to Morningstar data.
Fundsmith Equity
Unsurprisingly, those who are investing into active equity funds prefer those with a good recent track record of navigating both bull markets and tricky periods. Terry Smith’s Morningstar Gold-rated Fundsmith offering is a regular at the head of lists of the most popular funds on pretty much every investment platform in the UK.
The £18 billion offering invests in a 28-strong portfolio of high-quality businesses Smith believes are likely to continually compound in value. The fund takes a buy-and-hold strategy, with the holding period ideally being forever.
Some have outlined concerns that the fund itself has benefited from style tailwinds since its launch back in 2010, but Morningstar analyst Peter Brunt thinks Smith has added significant value above and beyond the strategy’s style bias.
“His input on the Tullett Prebon pension fund [which he advised before founding Fundsmith] also highlights his ability to add value over a market cycle,” Brunt adds.
iShares Overseas Government Bond Index
The first of three tracker funds run by BlackRock’s iShares business, iShares Overseas Government Bond Index tracks the JPMorgan Global Government Bond Index ex UK. It gives investors passive exposure to the market of investment-grade Government bonds issued by the largest developed economies excluding the UK.
The fund is heavily skewed to the US, with almost half its 700-plus holdings comprising Treasuries, and Japan, at a fifth. It also has significant exposure to both France and Italy, as well as Germany, where political and economic uncertainty continue to rise.
Morningstar currently has a Neutral rating on the fund, with analyst Jose Garcia-Zarate believing the investment proposition – a non-UK sovereign complement to UK gilt holdings – “comes across as more of a tactical overlay for a UK investment portfolio”.
The UK is also a fairly large part of the global developed sovereign bond index, too, and the exclusion of UK paper “makes for a rather volatile risk/return profile relative to peers… whether active or passive”.
River & Mercantile Dynamic Asset Allocation
The River & Mercantile Dynamic Asset Allocation fund says it aims to achieve a return of 4% a year in excess of cash, based on the three-month sterling LIBOR interest rate over a 12-month rolling period.
The £528 million fund invests dynamically across the asset class spectrum, with the portfolio as at March 31 dominated by ex-UK equities, at 55% of the fund. It invests predominantly in other funds, but also in exchange traded funds, with its largest position being in the iShares MSCI AC Far East ex Japan UCITS ETF.
Meanwhile, high-yield credit, sovereign bonds and emerging market debt accounts for 13%, 9% and 7% of the portfolio respectively. Just over 12% is in cash and cash equivalents.
Part of the team’s recent allocation moves has been to dial up its exposure to risk assets, from underweight to neutral, after the recent sell-off in markets that begun in October, says Tamsin Evans, head of multi-asset.
iShares Corporate Bond Index
The Bronze-rated iShares Corporate Bond Index fund tracks the performance of the Markit iBoxx GBP Non-Gilts Overall Index, giving investors exposure to corporate bonds from around the world.
This offering has almost half of its portfolio invested in UK debt, with Germany and the US coming in next at around 12%.
Garcia-Zarate notes that it is a cheap and interesting option for investors seeking a core holding in sterling-denominated corporate bonds. “The fund can work as a core building block in a UK-centric investment portfolio,” he adds.
However, the analyst does caution that, while the fund does a good job at tracking its benchmark, it can exhibit volatile performance relative to both active and passive peers.
“The non-corporate-bond segment of the index acts as a cushion or a drag depending on market conditions, but it also ensures that this passive tracker fund better mirrors how active managers tend to position themselves in this market.”
iShares Emerging Market Equity Index
Emerging market stocks were hit hard in 2018, with a combination of the US-China trade dispute, rising US interest rates, a strong US dollar and slowing Chinese economy weighing on the asset class.
As a result, an already cheap basket of stocks became even more attractive and investors have begun upping their weightings to the region.
Emerging markets aren’t known as the best area to allocate to passive investment strategies, but investors have been buying units in the iShares Emerging Market Equity Index fund so far in 2019.
The £1.7 billion fund has a large exposure to China, at a third of the portfolio, with Taiwan (12.5%) and India (11.75%) also big weightings. But the likes of Samsung Electronics is eschewed due to the fund tracking the FTSE Emerging Index, which does not recognise South Korea as an emerging market.
Top holdings are internet or technology names including China’s Tencent and Alibaba, and Taiwan’s TSMC, with South Africa-listed Naspers next in the list.
