InvestmentsJan 2 2018

Was 2017 really a banner year for fund flows?

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Was 2017 really a banner year for fund flows?

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?

The figures

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. 

The flows appear relatively complementary: Vanguard’s popularity has been based on its equity funds, while BlackRock has had particular interest in its iShares fixed income products. Its corporate bond and index-linked gilt trackers took in more than £3bn between them. 

L&G’s flows, meanwhile, were spread across a number of products and asset classes.

The table topper, however, is a company that focuses solely on active management: M&G. This represents a change of fortunes for the firm, which previously suffered two years of sizeable outflows. The driver of this change is the year’s single most popular fund: Richard Woolnough’s Optimal Income. Having seen £10bn in outflows between 2015 and 2016, the portfolio harnessed investor interest in flexible fixed income offerings in 2017 with an estimated £4.4bn of net new money in the first 10 months of the year.

Feeling flexible

Indeed, the overriding focus of those in the top 10 has been flexibility. Jupiter, like M&G, owes much of its success to its strategic bond fund. 

Aviva and Invesco Perpetual have continued to reap the rewards of the slump in interest in the Standard Life Investments (SLI) Global Absolute Return Strategies (Gars) fund. Their own multi-asset absolute return funds have taken in several billions this year, though the rate has started to slow in recent months.

Gars’ struggles mean that SLI is the worst performer in Table 2. Take it away, and the company would have enjoyed a small net inflow over the period. The picture is better still once Table 3 – detailing the multi-manager and fund of fund highlights – is factored in. The company’s MyFolio range has taken in more than £1bn this year.

For the purpose of this analysis, Standard Life and Aberdeen have been kept separate, and the latter also takes its place in Table 2, courtesy of its emerging market struggles. Three of those listed in the table take their place as a result of legacy outflows. 

Scottish Widows, Phoenix Group and Hbos are unlikely to feature on any intermediary’s list of providers to watch, and the redemptions seen here could indicate both the age of their existing business and the fact that charges for a number of their tracker products remain far in excess of peers’ fees.

Perhaps the most surprising name in Table 2 – and also contained in Table 5 – is First State. As with SLI, the firm’s outflows stem from a single fund, in this case Stewart Investors Asia Pacific Leaders. The portfolio has posted a return of 4.4 per cent over the past year compared with a 17.4 per cent jump for its benchmark.

The fund’s defensive qualities, which only become apparent when Asian stocks start to struggle, appear to be out of favour at a time when Asian indices are soaring. The retirement of longstanding manager Angus Tulloch last year may also have had an impact.

Another significant sufferer is Woodford Equity Income. Neil Woodford’s returns have suffered this year from a number of stock-specific issues, pushing him to the very bottom of the UK Equity Income sector over one and three years. Invesco Perpetual’s Mark Barnett, whose portfolio is similar to Mr Woodford’s, has also seen an increase in outflows as a result.

At the other end of the scale, just one equity fund features in the year’s list of successes: Terry Smith’s Fundsmith Equity has continued to find favour after another year of strong returns. Aside from that, the list contains four multi-asset funds, three trackers, and two active bond funds. As well as Optimal Income, M&G’s Floating Rate High Yield portfolio has attracted attention for its purported ability to combine a lofty yield with a more defensive approach to the asset class.  

In Table 5, as elsewhere in the survey, funds that have seen significant inflows as a result of corporate restructurings have been excluded. These figures can have a distorting effect: in BlackRock’s case, Morningstar’s headline figures show its overall inflow stands at £32bn for the year. But more than £24bn of this amount was due to some of the firm’s defined benefit funds being shifted into retail structures.

Multi-asset mix

The figures in Table 1 and Table 2 exclude fund of funds – figures for these portfolios can be found in Table 3 and Table 4. Jupiter does worst as a result of continued outflows from the Merlin multi-manager range. 

Another multi-manager range of old – that run by Schroders – was also among the most significant strugglers in 2017. Wealth manager 7IM also features in Table 4, but its offshore fund range – not accounted for by the Morningstar figures – has taken up much of the slack. 

Overall, what is striking is that few businesses saw material outflows from their multi-manager ranges, despite many investors now favouring more ‘modern’ multi-asset strategies offered by providers in Table 3.

Topping the pile here is Vanguard, whose LifeStrategy range has taken in £2.7bn in the first 10 months of 2017 alone. Its passive multi-asset funds have managed to outperform their average active peers over this period, and their charges, at just 0.25 per cent apiece, have clearly added to the attraction. 

The arrival of Vanguard’s own platform may increase flows further in future – owning distribution arms certainly appears to have helped Old Mutual and Standard Life.

Perhaps the most telling statistic of all, for fund managers and advisers alike, is one that is not explicitly stated in these tables. The rise of multi-asset is in no small part down to the need for fund solutions focused on retirement needs; for evidence of this, look to figures from the IA. 

For the third consecutive year, flows into personal pension wrappers are on course to exceed monies going into Isas.

It is perhaps this that has driven the record-breaking year more than anything else: while Isa sales levels are slightly above average, the £6.7bn that has flowed into personal pensions this year is already more than £1bn ahead of the previous annual record. Here, as in so many other areas, the impact of the pension freedoms is making itself felt.