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Investors go back to the future; The consumer is always right

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Times past

The latest Morningstar fund flows data hints that, amid the turmoil, UK clients have decided that the more things change, the more they stay the same.

The data shows inflows into bond and growth equity funds, with a shunning of UK equity and passive mandates. 

There were outflows of £2.5bn from equity funds in April, while bonds saw net inflows of £2.1bn.

Gilt funds were the most popular segment of the fixed income market, while global equity income funds were most popular among share investors. 

Growth funds such as Fundsmith Equity and Baillie Gifford Long Term Global Growth saw inflows after several months of outflows.

The firm with the largest outflows was BlackRock, at just over £1bn - most of that coming from its passive products, mainly the Europe ex-UK trackers and its £5bn Gilt index fund.

That fund, iShares UK Gilts All Stocks, is held by three DFMs in our database but the most commonly held Gilt fund is run by Vanguard. 

As mentioned above, it was a good month for global equity income mandates, and it was the Fidelity Global Dividend fund which was the largest recipient of this largesse, attracting net new money of £241m, with the same company’s UK equity tracker having outflows of more than £100m. 

That Global Dividend fund is one we recently highlighted for its popularity among allocators, appearing as it does in nine portfolios. 

So the return of bonds and growth, to the detriment of the value plays of Europe and UK, makes it all feel a little 2021 in nature. 

While bonds and growth may seem like precisely the investments to avoid in a world of high inflation, it may be investors are trying to second guess the market and prepare portfolios for a time when inflation has peaked and growth has cratered. 

Attempting to time the market is often viewed as a fool's errand, but in a stagflationary world, it's possible there isn't really any other choice and circumstances are so unprecedented as to render any alternative approaches redundant.

 

Consumed by optimism

Inflation, supply chain issues caused by the war on Ukraine and lockdowns in China have combined to send markets into a tailspin.

But Ben Gutteridge, director of the MPS service at Invesco, is sticking with equities as he feels consumers are in a much healthier position than might usually be the case at this point in the economic cycle.

Gutteridge says the reason for this is that consumers are actually in a fairly strong position - which is allowing them to continue spending.

He said: "Recognising such confidence runs counter to the 'cost of living crisis' previously highlighted, aggregate households enter this higher inflationary period with high levels of employment, wages on the rise, and balance sheet strength.

"What is more, in the face of a fading Covid/Omicron threat, pent up demand offers the potential to further fuel economic recovery."

In terms of fixed income, he is banking on government bonds to play their traditional role as a diversifier in case his base case is wrong.

Our database shows that at the start of May, Invesco's balanced portfolio had 47.5 per cent in equities, with the US being the favoured asset class, and 39.5 per cent in bonds. Indeed Invesco’s equity allocation is one of the lowest in our database.

Despite Gutteridge's equity comments, this actually represents an underweight for equities and an overweight for bonds relative to peers in the balanced segment, though his bullishness on the consumer outlook is atypical and may mean others have been busily cutting equity exposure in recent weeks.

Gutteridge will be appearing on the Asset Allocator Podcast in early June, so we will make a mental note to discuss this with him.

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