When it comes to judging investment providers, fund flows are far from the be-all and end-all. They often simply represent how effective a business’s salespeople have been in selling their firm’s wares, rather than being a true measure of how well funds are performing.
Nevertheless, there is value in studying such figures. At a fundamental level, the amount of money flowing into – or out of – a particular fund or sector is useful, often as a means of testing assumptions. Hefty flows into a single portfolio might mean its performance could be compromised, or that it will shortly close to new investors. Significant outflows usually indicate that returns have already become a concern for fundholders.
Broader patterns can also be discerned. Although the funds suffering the largest redemptions in 2017 have idiosyncratic issues, several are focused on UK equities. Many of the most popular, by contrast, share an affinity for multi-asset or global approaches.
Performing due diligence on fund firms is as important as assessing the merits of an individual portfolio. While some companies at the bottom of the tables have stuttered as a result of troubles at one or two hefty portfolios, others have suffered smaller outflows from a variety of funds. This may just mean the firm is suffering from the whims of flighty investors. But it should be taken into account during the selection process regardless.
Similarly, it is important to ask questions of the companies at the top of the tables. If they are experiencing interest in a range of portfolios, is this because their strategies are closely aligned with a particularly popular investment theme or trend? Does this make them vulnerable to a reversal in that sentiment?
Given the pressures on the industry, it is perhaps surprising that 2017 was a banner year for retail fund flows, according to the Investment Association (IA). At the time of writing, data is only available for January to October. But net sales of £33bn over that period already represent a record annual figure – that is, assuming there is no significant outflow in the final weeks of the year.
At a time of regulatory scrutiny and a wholesale shift away from hitherto popular areas – the UK All Companies and UK Equity Income sectors both saw net outflows over the period – what explains this popularity? One reason is the continued buoyancy of investment markets, according to FundCalibre managing director Darius McDermott.
“It’s perhaps little wonder money is going into stocks and bonds instead [of cash], especially as the bull markets in both asset classes show little sign of abating. But a correction is perhaps overdue,” Mr McDermott says.
Another factor is the rise of passive investing. The IA figures incorporate a record £8bn flow into tracker funds. Remove this and total flows – while still an impressive £25bn – have not yet exceeded the totals reached in 2009 and 2010.
Passive funds’ prominence is evident in Table 1, all figures for which are Morningstar estimates for the first 10 months of 2017. Three firms in the top 10 – BlackRock, Vanguard and Legal & General – derive their success from their tracker ranges.