Doubting the mantra of keep calm and carry on

John Kenchington

As far as I can tell it went unnoticed that earlier this year the fund industry suffered its first quarter of net outflows in several years.

UK-domiciled funds suffered withdrawals of £5.3bn in the first quarter of 2015, bringing to an end an epic winning streak inspired by the post-credit crunch bull market.

But there is something surprising about these outflows – they all took place in the institutional space.

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In fact, incredibly, net retail fund sales have been positive in every single month since October 2008.

Even during the carnage of that year there were just four months of net retail withdrawals and never more than £553m was taken out in any single month.

After the September 2007 run on Northern Rock, retail sales were still positive the following month. They only fell into small negative territory in November and December.

According to Investment Association statistics there have only been six months of negative retail sales in the 136 months since January 2004 – as far back as the records go.

Why on earth do retail investors keep pumping money in to funds, regardless of what is happening?

The reason must be the fact the industry is geared towards encouraging retail investors to buy funds all the time.

The broker firms, such as the notable example of Hargreaves Lansdown, are relentless advocates of the ‘keep calm and carry on investing’ mindset.

On a daily basis clients are told to ‘ignore the noise’ and be ‘long-term investors’.

The argument is that retail investors are incapable of timing the market and so should never try. But that is a convenient argument for an industry that clearly benefits from selling funds all the time. I think it’s correct to an extent, but there are clearly times when valuations are high and markets are not attractive.

You don’t jump into a car when it looks like it is about to crash, and you jump out if it is crashing with you in it.

I understand the principles of investment long-termism, but I refuse to believe it is always necessary to keep all of your money in funds all the time in the hope that things will work out in the long term.

Perhaps advisers and wealth managers are also playing a role. It’s probably hard to justify charging a client for advice if the advice is to ‘just leave it all in cash’.

Fund managers too are motivated to keep calm and carry on. If they move their funds into cash, then why should investors bother paying their fees?

We should be asking how we can help retail clients time the markets as the institutional investors do.

I fear that if the markets crash again in the coming months the industry will have repeated the same mistakes and retail investors will simply lose all trust.