Investors pull £665m from struggling absolute return funds

Bond funds draw in investors as monetary policy outlook shifts

Chris Cummings, IA chief executive

Mixed Asset and Sterling Strategic Bond funds were the preferred investment areas for investors in January but the Targeted Absolute Return sector continued to struggle as fears over Brexit, Europe’s economy and global politics spooked investors.

The Investment Association’s Sterling Strategic Bond sector saw net retail sales of £801m during the month while Mixed Asset funds took in £367m, according to the IA’s latest figures.

Overall, however, investors pulled £859m from funds from across the IA’s sectors in January, a stark contrast to the £4.2bn inflows recorded in January 2018.

Investment Association chief executive Chris Cummings (pictured) said the geopolitical backdrop caused savers to be cautious in their allocations.

“The threat of a no-deal Brexit, eurozone instability, and international trade tensions, combined to dampen investor appetite with savers looking towards Mixed Asset funds to spread their risk,” he said.

Monetary policy shifts drive fixed income inflows

AJ Bell personal finance analyst Laura Suter said: “Investors flooded into strategic bond funds last month, deferring the decision about bond allocation to fund managers, with £801m flowing into the funds – the highest inflows in a year.”

Willis Owen head of personal investing Adrian Lowcock also noted there was a big shift in outlook for interest rates at the end of last year which has played into the hands of bonds, hence the increased flows to strategic bonds and fixed income overall.

Fixed income was the second best-selling asset class during the month with net retail sales of £253m.

Targeted absolute return woes continue

At the other end of the spectrum, the Targeted Absolute Return sector saw £665m outflows.

Targeted Absolute Return has now seen outflows for the past seven months totalling £3.4bn. It has been the worst-selling IA sector for four consecutive months.

Lowcock said absolute return funds are supposed to be defensive but many of them in the sector have disappointed and investors are becoming increasingly disillusioned.

“It has struggled because of the macro environment since 2016,” he added. “It has been a challenging environment and some of the big names in that space, Standard Life Gars for example, have really struggled and they have seen a lot of outflows and there has perhaps been a bit of rotation back into equity/bond portfolios.”

Europe suffers but valuations attractive

Elsewhere, UK equity funds continued to take a battering in January as investors pulled £135m from the sector, while European equity funds fared even worse, seeing £450m of outflows.

Lowcock said sentiment towards Europe is being weighed down in part by Brexit but also by events such as the yellow vest protests in France, upcoming elections and weak economic data. However, he said the region is looking more attractively valued because it has been performing poorly.

“It may be that it is getting close to the bottom, but we are neutral on it,” he added. “It takes a while for UK investors to see that, particularly through a Brexit filter.”

Elsewhere, Japan and North America were the best-selling regions with £146m and £134m respectively going in to funds investing in these areas. However, Global funds lost £177m and Asia funds saw net retail outflows of £21m.

Ethical funds saw inflows of £66m in January, taking funds under management to £16bn, yet they remain flat as a percentage of total funds on the market at 1.4%  – the same level it has been for the past six months.

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