All aboard: March’s retail fund rollercoaster
As we enter the sixth week of lockdown, many of us may have adapted to this new normal, but there can be no doubt it has been an extremely difficult time for families and businesses struggling with the unprecedented circumstances.
It has been an equally bumpy ride for savers and pensioners, who rely on their investments to support them in retirement. With the fastest switch to a bear market in history, savers have found themselves suddenly thrown from the metaphorical teacup ride onto the triple loop rollercoaster.
In February, with headlines still dominated by the coronavirus outbreak in China and the first cases emerging in the UK, our retail fund sales data showed that despite growing caution, investor confidence was holding up.
But the extraordinary market conditions in March led to extraordinary outflows from retail investors, as they reacted to the news and took more decisive action, pulling £10bn from funds – the highest amount ever but still less than 1% of funds under management. The scale and speed of these outflows reflects the scale and speed of the economic dislocation affecting markets and economies globally.
Drilling down into the detail, the crisis has affected different asset classes and fund products to varying degrees.
Bond funds have so far felt the brunt of the crisis with £8 billion outflows in March. These funds have been weighed down by a number of different factors. Investors needing to take cash from their investments sold out of bond funds rather than crystallising losses from equities when valuations were low. The steep drop in share prices in the third week of March also left portfolios out of kilter: equities automatically shrunk as a proportion of portfolios in favour of bonds. Some of the March fixed income outflows relate to portfolios being rebalanced.
Equity funds have also seen large outflows of £1.1 billion, with global equity funds seeing the largest outflows of £1.3 billion.
This was offset against modest inflows into equity tracker funds which have remained in favour £467 million flowed into tracker funds in March, with savers’ home bias favouring UK trackers. This contributed to UK equity funds experiencing a £747 million inflow - a vote of confidence in British businesses at this difficult time.
Responsible investment funds also bucked the trend, as savers invested £113 million into funds with a focus on ESG. As we look to rebuild the economy and discussion around social good and the relationship between business and society gathers pace, there willbe a growing interest in the role this sector can play.
Despite these small bright spots, there is no doubt coronavirus has been hugely disruptive to the markets. Now we’ve hopefully made it through the first part of the crisis, savers will be reflecting on the impact of the market turmoil on their investments. The introduction of extensive quantitative easing by the Bank of England and Federal Reserve towards the end of the March may have succeeded in bringing calm to the market, but it is yet to be seen how much investor confidence has returned. Many savers investing for the long-term may decide that inaction is in fact the best course of action and will be looking to ride out the storm. Much now depends on how quickly the government can find a route out of the lockdown.
One thing we do know, when looking back at other periods of high volatility and economic uncertainty, markets have recovered and continued to provide returns to investors.