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Britons have enjoyed a prolonged period of economic growth and stability but the shock arrival of the credit crunch has provided the lubricant to previously "sticky" money. While asset-switching is common as a means of staying invested, the retail sector has suffered damaging levels of redemptions.

The general consensus is that the retail fund management industry is haemorrhaging money as panicked investors scrabble to migrate away from Europe and North America or perhaps withdraw from the equity market completely and shelter in high-rate cash accounts. Consequently, the credit crunch has instigated a topsy-turvy world whereby sectors previously considered "risky", such as Global or Asia-specific Emerging Markets, Japan and Specialist sectors have proved popular with asset-switching retail investors, while economic pessimism engulfs the traditional, supposed safe-havens of the developed markets.

For example, Schroders reported a bleak investment climate as redemptions - retail and institutional - eroded its profits by more than a quarter in the first half of 2008; total pre-tax profits declined from £185.6m last year to £135.7m in the six months to June. However, Schroders said it had fared better than the industry average and that its retail funds only dipped from £56.2bn to £51.2bn at the end of 2007.

Redemptions from Fidelity’s Magellan 3-star high-performing fund were so severe that in January it was forced to re-open to new investors; its manager was being forced to sell stocks to meet redemption demands. The $45bn (£24.5bn) fund is less than half the size of its peak in the late 1990s, yet returned 18 per cent to investors last year, outperforming the S&P 500 index’s 5 per cent return.

Similarly, the Sequoia fund, with its Warren Buffet investment model, reopened in May following 26 years as a closed fund because investor outflows had pushed its assets below the level of a decade ago. Property funds in particular have born the brunt of an investor exodus forcing some, such as Friends Provident and Scottish Widows Life & Pensions, to stall outflows by imposing a six-month notice period on redemptions. SW Life & Pensions' imposition in January was recalled on 18 August because “the liquidity position in the funds has been restored to a level where all requests can be transacted normally,” it said in a statement.

Needless to say, this type of frenetic market activity has not exactly calmed the rattled nerves of retail investors. But is the situation really that bad? Haven't we all been here before with previous downturns? Surely this is the to-be-expected flip-side of a capitalist boom-bust-boom cycle which, when it is good is very good and when it is bad is short, sharp and painful?

The IMA statistics support anecdotal reports that vast outflows have occurred during 2007 and continued into 2008. The total retail value purchases for 2007 stood at £43.8bn and with the 2008 half year repurchases at more than £22bn, the projected repurchases for year end 2008 would top last year’s redemptions by £2bn. In contrast, in 2001 and 2002, total repurchases stood at £14.6bn annually - a third of last year's redemption levels.

Even sectors which sheltered investors during the previous "long rainy day" of 2001-02, namely blue chip funds in the UK All Companies sector, UK Gilt funds and UK Corporate Bond funds, plus the dash for cash into Money Market funds, have all failed investors as we enter the credit crunch crash.

Ian Clarke, investment research manager at the UK's largest IFA network, Sesame, said: "The current conditions are particularly nasty and not typical of the 'usual' reaction to the market getting ahead of itself. The fall-out from the credit-crunch sapping economic growth has coincided with high and rising commodity prices driving inflation."

He says that in the present downturn even cash is not safe as it typically exposes investors to bank and building society risk. Consequently, some of the more aggressive Money Market funds have surprised investors by falling in value, he says, while inflation will take its toll on UK Gilt and Corporate Bond funds despite recent strong performance.

Gavin Haynes, investment director at Whitechurch Securities says that the UK Equity Income sector, which was traditionally in stormy conditions, has also suffered this time.

“Dividend-paying sectors have underperformed because the banking sector is a key area for yield funds and the last 18 months has been grim for that. In addition, other yield funds in real estate and telecoms suffered. In the last 18 months equity income funds have had a very hard time; there have been 20-30 per cent falls in some of the leading named funds. That is creating uncertainty for investors because they would have historically seen this as a lower-end risk exposure.”

Instead, he says, growth funds have been favoured and investors continue to buy into the “commodities story”. Retail net sales within the UK Equity Income sector last year were consistent with those during the last slump, at £1,475,952,685 in 2007 compared with £1,432,008,490 net sales in 2002. However, redemptions in 2007 were around six times those of 2002: £6.7bn to year end 2007. This year's figures are on track to repeat that level.

Some good news can be found in the UK Smaller Companies sector, which has experienced pretty stable sales levels and similarly repurchases barely wavered from £1.2bn since 2006. Redemptions in this sector are even on track to drop to around £900m by year end 2008.

Jane Coffey, head of equities at Royal London Asset Management, says this is "quite surprising." She continues: "As a fund manager, we have definitely reduced our exposure in the mixed funds to the smaller end of the market because they tend to be much more volatile in these type of market conditions. We think there are some good opportunities within the smaller companies area but I wouldn’t expect that sector to go up until later in 2009. Then we would expect to see smaller companies come to the fore, leading the market upwards into the recovery."

Ms Coffey believes smaller companies allocations tend to be "stickier" than other sectors because performance is so dependent on good stock picking rather than simply buying into an asset class. It also tends to be a growth sector and therefore may not be the first area to suffer redemptions, although smaller cap stocks are renowned for their short-term volatility.

Japan, a sector which has not exactly set the party ablaze, has also held up surprisingly well; repurchases fell between 2006 and 2007, and retail net sales improved in Q2 2008 from a loss of £191.5m to a gain of £156m. Richard Pursglove, head of UK retail sales at Gartmore says: "Japan is a sector which has not performed particularly well but people see relative value in Japan. We are certainly getting feedback about clients favouring Japan and there has been some asset allocation adjustments towards Japan, away from other more mature economies."

However, he warns against drawing comparisons between the present downturn and previous epochs such as 2001-02 and the early 1990s. The mobility of assets has significantly grown, he stresses, the value of assets is much greater than it was eight years ago, and improved information flows has created a more informed and enabled investor.

While good advisers will have drummed into their clients the boom-bust ethos behind capitalist markets, such increased volatility has already scared off some speculative investors, Mr Haynes says. "A lot of investors have experienced the ups and downs over the last decade and realise that goes with the territory of stock market investing. Equally, a lot of speculative investors got their fingers burnt during the tech boom and bust and have not returned to the market." Instead, he suggests, it is the fast-buck dabblers that have piled into residential property during the "noughties".

However, Ms Coffey believes some current investors may also be scared off by the frequency of equity "busts". She explains, "People were just starting to come back into equities over the last two to three years and it has gone down again. Maybe they are saying 'this is too volatile for me, I remember the 2001-02 crash, I haven’t lost a lot of money so I’ll take profits now rather than be a long-term holder'. If something happens frequently, people learn and may employ a different tactic than the buy-and-hold we were taught."

While 2001-02 was born from highly inflated (particularly TMT) stock valuations, causing a "profits recession," today underlying valuation falls are more broadly linked to the global economy; questions about future earnings against a backdrop of rising inflation, increasing interest rates and slowing growth. Some say this is an inflection period, that within 12 months equities will be re-rated and the recovery will start in earnest. Others fear a global recession the likes of which we have never before experienced.

Main Points:

Redemption outflows have been more severe than in the 2001-02 downturn, although comparissons should be treated with caution

Previously defensive sectors such as UK Equity Income have underperformed due to their reliance on banking stocks

Some sectors have surprised with their resilience, including the UK Smaller Companies and Japan sectors

Previous stock market "busts" have scared off speculative investors, leaving a more educated breed of investor in the marketplace