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Flows data shows laws of nature cannot be avoided; Trusts are on song for allocators

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Nature is healing

The advent of spring reminds us that amid all the uncertainties of the world, some things are eternal. Lambs gambolling through fields, balmier evenings and the emergence of daffodils from ground which just weeks ago was cold and unyielding.

And so we turn to the Investment Association's latest fund flows data.

This indicates that in markets, as well as nature, patterns recur.

US equities, passives and even ESG funds attracted strong support, much as they have done for much of the past decade. It's almost as if the brief rotation towards value never happened.

This perhaps creates a feeling of deja vu all over again for allocators who have anticipated a change in market sentiment for more than a decade. 

The data shows investors withdrew a net £2.5bn from retail open-ended funds in March, with almost all equity sectors in outflow. US equities however had an inflow of £570m.

It's also worth noting that the IA North America sector has outperformed both the UK All Companies and the IA Global sector during 2022 so far.  

The above chart shows all three sectors are firmly in negative territory this year, and perhaps this is contributing to investors losing further faith in active management - indeed the IA data shows £1.3bn went into passives in February, roughly double January’s total.

Passives now account for just shy of one pound in every five, or 19.3 per cent, of all the assets of the IA fund universe. 

One thing that has changed is the sharp shift in sentiment against bond funds, with £2.4bn of outflows.

As with lambs and daffodils, this shows nature always finds a way. There is no escaping the fact it becomes harder to own fixed income assets at a time of quantitative tightening and rising inflation, regardless of your opinions on the economic outlook.

In the teeth of such radical uncertainty, flows data could look very different next month, but the current numbers call into question some of the assumptions around value and growth that have come to dominate the narrative.

Trusting times

An interesting nugget popped into the Asset Allocator inbox this week, as data from ISS Financial Clarity showed 2021 to be the best year on record for adviser purchases of investment trusts, with £1.29bn allocated - an increase of 23 per cent on the previous year.

Of course, as with any statistics based on cash amounts, the impact of inflation has to be considered. But the direction of travel is clear. 

It is perhaps more revealing that in total 2,028 advice firms bought investment trusts in the final quarter of 2021 - an increase of 34 per cent on the prior year.

Unless thousands of advice firms have suddenly appeared from nowhere, that means existing firms are starting to buy more. 

Asset Allocator's database hints at what might be driving the growth, with the most widely-held trusts among the allocators covered being Round Hill and Hipgnosis - both vehicles which invest in music royalties and each appear in three portfolio ranges.

The big daddy of the trust world is of course Scottish Mortgage, which is so big it sits in the FTSE 100. It appears in two portfolios, the same number as its Baillie Gifford global equity stablemate Monks Investment Trust.

None of the other trusts we cover appear in more than one portfolio.

Music royalty trusts tend to have quite a high yield, indeed Hipgnosis yields more than 4 per cent which held obvious appeal as an alternative to bonds in a world where the latter had a negative yield. 

But as bond yields rise, the strength of that appeal may diminish and indeed those trusts now trade at significant discounts.

We will soon find out if the popularity of these trusts in particular, and trusts in general, continues.

But data from Numis shows trust fundraising fell 50 per cent in the first quarter of 2022 to £2bn amid concerns about interest rates and inflation, suggesting the music may not last all that long.

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