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The retail fund flow bonanza; Three Q4 pluses and one minus for allocators

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Rude health

As the fourth quarter of 2020 kicks off, it’s worth checking in one final time on how fund buyers were positioning in the run-up to the final months of the year.

Today we’ll look at the retail universe as a whole – as opposed to just DFMs. The standout statistics from the latest set of fund flow data is that investors have now cottoned on to European equity funds’ upturn in fortunes. Net flows into these strategies reached their highest level in three years in August, according to latest Investment Association figures.

As an asset class, equity funds similarly returned to net inflows on the month, with emerging markets and UK equity funds of all stripes being the notable outliers. But there were other signs of caution around the market. US funds saw net redemptions for the first time since March – retail reticence here being in apparent contrast to wealth firms’ own actions.

High yield debt also saw outflows and, in a noteworthy move, absolute return strategies enjoyed their first net inflow for more than two years. Institutional investors, meanwhile, pulled more than £2bn in assets from across their holdings, the largest redemption since February.

But from a retail point of view, 2020 is still proving to be relatively positive. As it stands, asset managers are on track to record their second-best year for retail flows since 2014, having amassed a net £12bn in new money in the first eight months of the year. That’s despite almost £10bn being pulled during the March panic alone. All in all, from the retail investment industry’s perspective, things could be a lot worse.

Shot in the arm

The upwards move in equity markets overnight has been pinned on renewed hopes of a second major stimulus package in the US. Talks on this front have continued for some time now, though there's a school of thought that says a rising US stock market makes such action less likely prior to the election. There are certainly (cynical) political incentives which mean delaying such a move until after November is an attractive outcome for some. But the positive noises now emerging suggest cause for greater optimism.

Looking further ahead, allocators are continuing to ponder what the elections themselves might mean for the world’s largest equity market. A second term for president Trump would probably produce more stimulus of one kind or another. Conversely, what's currently seen as the most likely scenario - a Democratic presidency, with Republicans retaining control of the Senate - would likely lead to political gridlock, and probably favour the status quo of a tech-dominated market.

But the odds on a Democratic clean sweep are starting to narrow, and that would shake things up for investors: it’s this outcome that would arguably prompt the biggest stimulus package of all. Moody’s is among those to say this electoral outcome would do most to spark growth. The question of whether it would aid the likes of value investing is less clear-cut, given the potential for greater regulation of bank and oil stocks.

Be that as it may, the range of outcomes presented above all have one thing in common: a sense that they won’t be actively detrimental to the equity market. The only result that might do so is no result at all: a contested election outcome would mean all bets are off.

Don't look down

The FCA has today said it will extend its “flexible approach” to the Mifid 10 per cent drop rule for another six months. That's music to the ears of those for whom administrative issues became all too much back in March.

It'll also be welcomed by those of a superstitious nature. The original decision was announced on April 1 – and in retrospect, that date looks a little like an April Fool, given how close it was to the market bottom. Since then, there’s been little sign of a reversion to the dramatic slumps seen in March. Another six months without such alarms would be very welcome.

Of course, this theory would imply the steep drops will return just as soon as the regulator reinstates the rule. But its decision today pointed not only to Covid-19, but also the forthcoming end of the Brexit transition period, as reasons for the delay. If macro events of all kinds are now used as justification for extending the hiatus, some might wonder if the rule won’t return for a long time yet.

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