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Discretionaries notch up worst month on record; UK fund boutiques plough own furrow

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Pulling back

New data from the Investment Association makes for grim reading for UK equity funds - and for DFMs themselves.

July fund flow statistics from the trade body reveal that a net £1.2bn was withdrawn from UK equity funds on the month. The blame, unsurprisingly, has been pinned on political uncertainty. But it’s worth highlighting that this figure is even higher than the outflows recorded in the period surrounding the EU referendum in 2016. 

Widespread equity outflows were at least offset in July by resilient multi-asset funds and a continued boom in fixed income sales - driven once again by a record-breaking month for Strategic Bond fund inflows. 

There are fewer silver linings for wealth managers. Net retail sales via discretionary fund managers hit a record low on the month; £860m worth of net withdrawals surpassed the previous nadir set last October. The difference between now and then, of course, is that the market sell-off seen in October 2018 was nowhere to be found this July.

That implies that the principle factor this time was either a sense of renewed caution on DFMs’ part, or forced redemptions made as clients withdrew their business. In truth, it may be a bit of both. Neither spells particularly positive news for the months ahead.

Despite this gloom, there is one part of the retail investment market still going from strength to strength. Tracker funds’ share of industry funds under management rose by some 50 basis points on the month, to 16.9 per cent. Add in ETFs, due to be included in the IA universe for the first time early next year, and the direction of travel for passives looks ever more assured.

The middle kingdom

Despite the upheaval detailed above, underlying fund flow trends are still pretty ingrained. Last week we highlighted research showing that most of this summer’s winners are asset managers that have been flourishing for a year or more. Similarly, those who have struggled over the medium term have found it difficult to shake off those woes in recent months. 

When it comes to DFMs’ tendencies, however, there are other patterns to consider - like the fondness they tend to have for mid-tier businesses. Too small to be home to sprawling fund ranges and endless M&A-driven integration issues, too large to be easily swallowed up by a giant peer, these asset managers are finding favour with wealth firms.

But the notion of the squeezed middle is still very much alive elsewhere: the US, for example. A report from Cerulli published this morning finds that two thirds of US firms with between $5bn and $50bn in AUM failed to record positive fund flows over the past half-decade.

It’s no shock that the US market is very different from its UK equivalent: $50bn-plus asset managers have long since been the norm rather than the exception. So the sub-$50bn ‘middle’ is more like a bottom tier in this case. 

Nonetheless, it’s a hint that wealth managers’ favourite UK fund firms, like it or not, may eventually have to shed their boutique cultures. Indeed, they may ultimately prove victims of their own success: years of inflows have already started to redefine the term ‘boutique’. The IA’s annual asset management survey, published later this month, should tell us more about how fund firms are juggling these competing pressures.

Missing link

Yesterday’s action in the House of Commons inevitably shoved the government’s spending review off the front pages. And it pushed a significant development for UK bond investors still further down the agenda. 

The government’s decision to overhaul RPI has had a significant impact on the index-linked gilt market, with some prices falling as much as 10 per cent yesterday

Most discretionaries will be grateful to have avoided the carnage. Index-linked gilts are not as popular as they once were among the wealth managers tracked by our fund selection database, particularly now conventional sovereign debt has returned to favour in some quarters. That will have proven a small mercy at a time when many were looking at a very different part of their UK exposures.

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