New rules are revitalising markets

Following the introduction of the Retail Distribution Review (RDR) in 2013 many had expected the investment landscape to change dramatically, with a renewed focus on charges and transparency creating a ‘level playing field’ for the likes of investment trusts and exchange-traded products (ETPs) that hadn’t previously paid trail commission.

While the rules requiring advisers to look at all the investment options available for clients has to some extent seen an increase in the popularity of some vehicles, it is the investor’s attitude to risk and demand for a specific investment outcome that is really driving innovation in the marketplace.

This is likely to be further supported by the pension reforms announced by chancellor George Osborne in the March 2014 Budget, which mean retirees will no longer have to buy annuities with their pensions after April 2015, along with additional flexibility in how they can withdraw their pensions.

Income has been a key driver for many investors in recent years, given the low interest rate environment and low inflation, with bond yields at record lows and returns on cash being almost nonexistent.

Therefore it is perhaps not surprising that absolute return funds, bonds, equities and multi-asset options such as the Standard Life Global Absolute Return Strategies (Gars) fund have exploded in popularity. This is further underlined by the recent launches of similar products by both Invesco Perpetual and Aviva Investors by former members of the Gars team.

Figures from the IMA show the Targeted Absolute Return sector was the sixth best-selling peer group in June with net retail sales of £112.5m, while the UK Equity Income sector topped the list with £1.38bn of net retail sales.

Meanwhile, the monthly net retail sales for the past year show just eight of the 37 sectors saw positive inflows for all 12 months to June 2014. While these included on-trend sectors such as Japan and Property and the hard-to-define Unclassified sector, the other popular areas suggest a specific mindset from investors.

The remaining five sectors are the Targeted Absolute Return, Global Equity Income, Mixed Asset 0-35% Shares, Mixed Asset 20-60% Shares and Mixed Asset 40-85% Shares, which suggests that investors are clearly attracted to funds that either offer a specific risk/volatility level or have a focus on providing a certain product such as income or a specific level of outperformance.

Ben Seager-Scott, director of investment strategy at Bestinvest, notes: “I think we’re seeing quite a few new products coming to market, particularly those targeting income, but I think there are so many factors driving this, that it’s difficult to discern the magnitude that any given factor has in driving change.”

He points out that while many suggest the RDR has created a more level playing field for listed products, the ETP industry has in fact been growing rapidly for many years as investors become more comfortable with the instruments and their different variations.

“The pace [of growth of ETPs] in the UK doesn’t seem very different to the growth across Europe and in the US, which generally haven’t had these RDR factors to consider. So while the RDR, pension reforms and so forth are factors influencing product innovation to some extent, in terms of actual underlying investment vehicles, I think their contribution is fairly marginal compared to some of the more global factors,” he adds.

Nyree Stewart is features editor at Investment Adviser

Key facts

• The IMA UK Equity Income sector has been the best-selling sector for net retail sales in June and April 2014

• The Targeted Absolute Return sector saw net retail sales of £112.5m in June and was the best-selling IMA sector in January 2014.

• Only eight sectors have recorded 12 months of consecutive positive net retail inflows, five of which are areas with a specific outcome.