Investors continued to derisk their porfolios in October, pouring cash into Money Market funds. The latest Morningstar Direct fund flow data reveals £880 million was funnelled into the sector in the month - the largest monthly net flow into the category for more than two years. These funds, which invest in some of the safest assets out there, are often a popular choice at times of uncertainty, according to Morningstar Investment Management's Mark Preskett.
But demand for bonds was somewhat muted. After attracting inflows of £1.2 billion in August, the category saw net inflows of just £134 million in October - an eight-month low. That is, perhaps, not surprising though; years of quantitative easing and rock-bottom interest rates mean that bonds no longer pay the reliable income they used to - in fact, many offer a negative yield. The M&G Bond Vigilantes team believe invstors need to rethink the role of bonds in their porfolio.
Elsewhere, equity, alternative and property funds continued to bleed assets. Equity funds in particular remained unpopular in October, with many steering clear of the UK stock market ahead of the expected Brexit date of October 31, which has since been pushed back to January, with a General Election in the calendar for December instead. The cloud of the Woodford fund closure also continues to weigh on many investors' minds. With so much uncertainty, the asset class saw £1.1 billion of net outflows - the total net outflow for equity funds over the past year has summed up to almost £10 billion.
One victim of the trend in UK large-cap equity category is the Neutral-rated Majedie UK Equity fund, which has seen an increase in the rate of net outflows in recent months. A further £167 million was pulled out of the fund in October.
UK property saw another £300 million withdrawn in October too, with outflows over the past 13 months now totalling a hefty £2.7 billion of net outflows. Alternative funds were another victim of investor malaise; the Neutral-rated ASI Global Absolute Return Strategies and Neutral-rated Invesco Global Targeted Return saw the heaviest outflows of the month. Year to date, the two funds have lost 50% and 20% of their assets respectively.
It's no surprise then that Invesco was among the fund houses to experience the largest outflows in October. Earlier this month, Morningstar downgraded two of the firm's most well-known funds, Invesco Income and High Income to a Neutral rating amid fears about manager Mark Barnett's exposure to small cap stocks. Indeed, the two funds suffered some of the largest outflows in the month.
Baillie Gifford also suffered its highest ever monthly net outflows, with the main contributor being the £715 million Bronze-rated Baillie Gifford Global Alpha Growth. Some four of the top five funds of the month by inflows are Money Market funds. The only alternative category to see significant net inflows over the past 12 months was the alternative long-short credit category. The biggest fund in the category, BlackRock Absolute Return Bond, has been the driver of net inflows, contributing 70% of the £1.1 billion total net inflow.
The only alternative category to see significant net inflows over the past 12 months was the alternative long-short credit category. The biggest fund in the category, BlackRock Absolute Return Bond, has been the driver of net inflows, contributing 70% of the £1.1 billion total net inflow.
Passive Bucks the Trend
Bucking the trend, however, are passive funds, which continue to grow in popularity with investors. Over the past year, £18 billion has flowed into passive funds, while actively managed options have endured outflows of £39 billion - the chart below shows the difference in flows between the two types of funds, with passive flows consistently in positive territory. While active funds still dominate overall, with three-quarters of global assets, passives are quickly catching up. The trend continued in October, with index funds enjoying £1.3 billion of net inflows in the month.
The US large-cap blend equity Morningstar Category saw relatively high net inflows of £567 million, 95% of which went into passive vehicles such as index funds. The US stock market is a particularly popular one in which to invest through an index fund, says Bhavik Parekh, associate analyst at Morningstar.: “It is generally considered to be the most efficient market, and therefore the most difficult to beat."
