UK retail investors have surprised fund selectors by adding to Asian equities in a month that was otherwise favourable for bonds and risk-off sectors, based on the July fund flow figures from the Investment Association.
Asia funds came in as the best-selling equity region in July with net retail sales of £154m, while investors pulled £1.2bn from UK equities.
Global funds came in second place with net retail sales of £146m, while all the remaining regions experienced outflows. North America funds experienced net retail outflows of £90m and Japan funds saw net retail outflows of £205m. Europe net outflows of £430m were almost a third smaller than that suffered by the UK.
Strategic bonds lead the way
Across asset classes, the IA figures revealed £ Strategic Bond was the best-selling sector with net retail sales of £1.2bn. Global bonds attracted £406m.
Chris Cummings, chief executive of IA, said: “Appetite for stocks and bonds was poles apart in July 2019, as savers looked to weather the ongoing political and economic uncertainty by diversifying their investments and seeking out safe haven assets.”
Fixed income was the highest selling asset class for the fifth month in a row as net retail sales reached £2.2bn. Equity outflows totalled £1.7bn by comparison.
Chelsea Financial Director managing director Darius McDermott said Brexit has definitely created a risk off mentality and the flight to bonds is often a sign of that.”
But McDermott was surprised strategic bonds rather than one of the other bond sectors came top, but said it still fits the narrative of people heading for bonds as opposed to equities.
Adrian Lowcock, head of personal investing at Willis Owen, said: “Strategic Bonds are an easy way to get exposure to the bond market without having to make a significant tactical decision as investors can allocate to bonds and then allow the fund manager to make the detailed decisions as that is their expertise.”
Asia fund flows surprise industry
The biggest surprise for the industry was flows into Asia funds.
Shore Financial director Ben Yearsley said: “The one surprise was the inflows into Asia. I’m pleasantly surprised at this as I’m a big fan of Asia on a medium to long term view as price and growth prospects both look compelling. Despite the Hong Kong protests investors are looking beyond this.”
Similarly, AJ Bell head of active portfolios Ryan Hughes said: “The interesting take away for me is that Asian equities was the highest net money taker in the equity space over the month as this doesn’t necessarily chime with the rest of the data that implied a risk off sentiment.
“While assets flowing into fixed interest dwarfed equities, within equities Asia is clearly still favoured for its growth prospects despite the issues in China and the ongoing trade war with the US.”
Brexit uncertainty diminishes sentiment
But Yearsley said it was “no real surprise” that UK equities suffered further outflows.
He said: “Brexit uncertainty is putting investors off, despite the relative cheapness of UK equities versus many global equity markets. This will continue whilst there is paralysis in parliament – yesterday’s votes will do nothing to dampen nervousness and uncertainty.”
Hughes said while it is not surprising that sentiment has been poor in UK equities “investors could missing an opportunity”.
“UK equities currently offer a low PE and a high dividend yield and we have seen some signs of M&A activity from overseas buyers looking to take advantage of the weak currency,” he said.
“Dare I say but if we get some kind of political clarity, UK may well surprise investors.”
However, Lowcock said these figures are “less of a Brexit issue” as July was the only time it was really quiet on the subject. “Clearly investors remained concern over the UK’s outlook and they are just avoiding the area.”
