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Fund buyers refuse to be swayed by flight from risk; Signs of resilience emerge for DFMs

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Business as usual

UK fund sales notched up their worst month on record in March, according to new estimates. The more surprising finding is the statistics' implication that fund buyer preferences weren’t materially affected by the sell-off.

A net £8.7bn was withdrawn from UK-domiciled funds last month, per Morningstar figures. Forthcoming Investment Association data for March, calculated slightly differently, is likely to tell a similar story. But that narrative is complicated by the fact that this was, in many ways, business as usual for selectors.

As equity markets endured their fastest-ever fall into a bear market, professional fund buyers seemingly took a step back and simply doubled down on their existing calls.

Take the UK All Companies and Targeted Absolute Return sectors: the former took in £1.5bn on the month, whereas the latter shed £1.8bn. That’s very much in keeping with recent trends, but isn’t the outcome you’d expect amid a flight from risk.

Similar behaviour was in evidence when it came to individual funds. Of the 25 that suffered the largest net outflows in March, only two had previously been enjoying net inflows for 2020 to date. Even high-profile withdrawals from the likes of Fundsmith Equity, which saw a net £460m depart, weren’t out of keeping with previous months: the strategy had already shed a total of £170m in January and February.

In that case, profit-taking is likely to blame. But the wider shift from active to passive strategies can’t be underplayed. It’s here that an acceleration of existing trends is most apparent. A net £3bn was invested in passive equity funds in March, compared with an outflow of £4bn from active strategies. And of the 20 top sellers across all asset classes, just two – the outperforming Allianz Strategic Bond, and buyer favourite JOHCM UK Dynamic – were active in nature.

Standing firm

DFMs have had it as tough as any part of the retail investment chain so far in 2020. Scrutiny of their processes – and their charges - is being stepped up as volatility returns. And in an industry whose fortunes are in part reliant on buoyant markets, results like those posted by Brooks Macdonald last Thursday look instructive: flat flows and 11 per cent fall in DFM assets in the first quarter.

On Friday, however, Brewin Dolphin’s own trading update showed there’s still room for optimism in the sector. Its DFM assets fell almost 15 per cent in the first three months of the year, but the business did manage to pull in £400m in net flows at the same time.

Subsequent quarters in 2020 may prove more challenging for wealth managers, despite the rally now being enjoyed by US equities in particular. Model portfolio service performance is holding up, and signs from both Brooks and Brewin indicate that flows here are proving relatively resilient. In the investment industry, however confidence is hard-won and easily lost – and even the best investment managers might struggle to reassure clients in the face of a global pandemic.

But Brewin’s shares rose 15 per cent on Friday, helped by its lack of debt and, notably, signs of healthy demand for its financial advice arm. The benefits of getting vertical integration right look obvious at the moment: those who have established relationships with their investors stand a better chance of holding the line when it comes to flows.

Falling down

Equities may be on a firmer footing in April, but the pain keeps on coming for oil. Another 25 per cent drop today has sent the price of WTI below $14 a barrel for the first time this century, and there’s even talk of negative oil prices for some blends.

That has obvious implications for commodity-heavy indices like the FTSE 100, and big dividend payers like BP and Shell. As we noted last month, there’s still optimism among investors that the two oil majors can maintain their payouts: needless to say, both are much more than a simple play on oil prices. Recent history suggests that those prices will continue to be volatile in the coming months, as investors attempt to factor in an unprecedented slump in demand. All that said, BP and Shell might not be able to sustain many more days like today without paying a more serious cost.

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