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The Investment Association’s update on UK fund flows delivered yet more bad news to managers of UK equity funds with another £697m fleeing the asset class in August – that brings the total outflows year-to-date to £2.8bn and a staggering £15.1bn since the start of 2016, the year the UK voted to leave the EU.
As Prime Minister Boris Johnson attempts to push through his version of the Brexit deal with less than a month to go until the Halloween deadline to leave, sentiment for UK stocks couldn’t be much worse.
Furthermore, UK equities were far from alone in seeing outflows in August with overall net retail outflows of £1.7bn, a jump from outflows of just £16m seen in the same month last year.
Equities, fixed income and property all saw significant outflows, however, the diversified and less volatile sectors saw inflows indicating the investor was firmly in the risk-off camp.
Mixed Asset was the best-selling asset class with £706m in net retail sales, while sectors grouped into Other (which includes the Targeted Absolute Return, Volatility Managed, Protected and Unclassified sectors) was the second best-selling asset class with £168m of inflows.
Interestingly, Money Market was the third best-selling asset class with £36m in net retail sales.
A further indicator of investors’ caution is the movements in the VIX – the measurement of the 30-day implied volatility of S&P 500 index options – which ticked higher over the summer and then again towards the end of September to around 20.
As the equity cycle enters its later stages and the number of bonds around the world posting negative yields tops $16trn, it is unsurprising that investors may be looking to batten down the hatches. Once perceived a safe haven, trade press articles this week report that wealth managers and multi-managers alike are ramping up gold exposure particularly as political turmoil in the UK and abroad shows no signs of abating.
The market sell-off seen in equities this week – the FTSE 100 is down 4.7% over the past five days of trading – has already prompted speculation that the fourth and final quarter of the year will be its most volatile, echoing last year.
Adrian Lowcock, head of personal investing at Willis Owen, commented: “Recession fears are back at the forefront of investors’ minds. The global outlook has been negative since the summer and concerns have been growing. The global economy has been slowing down as the US trade war with China affected all countries. On top of this, the geopolitical landscape is worrying. A possible impeachment of Donald Trump, fears of a no-deal Brexit and rising tensions with Iran in the Middle East all mean investor sentiment is weak.”
However, Edward Park, deputy CIO at Brooks Macdonald, said that weaker US ISM manufacturing data which came out on Tuesday is the likely catalyst of this week’s equity weakness but he isn’t entirely convinced it will lead to a full-blown correction…yet.
He said: “We do not see this early fourth quarter weakness as heralding the end of the equity bull market however the central bank reaction to declining US data will be key for equities going forward. At the moment, sentiment seems reasonably sanguine with traders and clients more accustomed to volatility after Q4 2018 as well as May and August 2019.
“Should we see services PMIs start to slip and join the weaker manufacturing data in contractionary levels we would expect market expectations to be revised down catalysing a selloff. For the time being, we are keen not to focus too precisely on one data point and await further data to support a slowdown narrative.”
Over the next few months, I will be researching sentiment in the DFM market, gauging asset allocation changes as well as probing what wealth managers think are the safe havens on the 2020s, which will be published in the Wealth Manager Review 2020. For more information or to participate in this research please contact email@example.com
Given the national coverage of the suspension of the Woodford Equity Income fund, and the involvement of HM Treasury and the Financial Conduct Authority, it is no surprise that the wider asset management industry reputation will have taken a hit.
However, the first Private Investor Pulse Study carried out by Research in Finance in July has revealed some shocking figures; three quarters (74%) of private investors surveyed said the news about Woodford Investment Management had negatively impacted trust in the asset management industry.
For background, the firm suspended its Equity Income fund in early June following numerous redemption requests amid increasing liquidity concerns as manager Neil Woodford moved to cut the portfolio’s position in unquoted holdings to zero
The suspension led to wide criticism with Nicky Morgan, chair of the Treasury Select Committee at the time, writing to the FCA and platform giant Hargreaves Lansdown. The latter came under fire for continuing to back the Woodford funds amid a prolonged period of underperformance.
In the Pulse study, 41% said they are either currently invested or have previously invested in a fund from Woodford Investment Management, and 32% of these said they had been impacted by the suspension of dealing in the Woodford Equity Income fund.
Furthermore, 87% of investors who had purchased a Woodford fund based on them being a featured in a platform shortlist/select list said it had negatively affected trust in platform shortlists/select lists.
Specifically, over 40% of investors that had purchased a fund run by Woodford Investment Management said they had done so because of its place in Hargreaves Lansdown’s Wealth 50.
This is the second highest factor to contribute towards their decision to buy, with the top reason being Neil Woodford’s reputation, which was cited by 79% of private investors.
Other popular influencers to include Woodford funds in private portfolios include performance figures (cited by 25%), the finance section of newspapers (22%) and ratings (16%). Meanwhile, arguably some of the most important documents are left behind in consideration with the funds’ prospectus, factsheets and Key investor Information Documents (KIID) were further down the list and reports/accounts only received 1% of investors’ votes (see chart).
Although HL removed the funds immediately after the suspension and dropped the platform fee it charges for holding the fund, while calling on Woodford to also suspend its own fees but this was clearly not enough for some private investors.
However, more encouragingly, attitudes to asset managers overall, however, were more balanced. In response to the statement ‘I believe asset managers have my best interests at heart’, 33% of private investors agreed and 33% disagreed, while 34% neither agreed or disagreed.
Research in Finance launched the Private Investor Pulse study in July 2019. It is an online quantitative study surveying 307 private investors. If you wish to access the panel to discover insight for your own business do contact the team.