Investors flee retail funds amid inflation and Ukraine worries

Investors flee retail funds amid inflation and Ukraine worries

Investors pulled £2.5bn out of retail funds in February as concerns over inflation rose and the war in Ukraine broke out.

Data released by the Investment Association yesterday (April 7), showed the steep rise in redemptions, which is more than double the £1.2bn seen in January.

Chris Cummings, chief executive of the Investment Association said Russia’s invasion of Ukraine added to the already-strong market turbulence.

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“High inflation and growing economic uncertainty provided an uncomfortable backdrop for escalating tensions between Russia and Ukraine throughout February,” he said.

Fixed income funds suffered particularly in February, experiencing outflows of £2.4bn, up from a loss of £344mn in January.

Rising inflation in recent months has led to bond funds falling out of favour due to the real value of the future income from the bond being eroded.

Laith Khalaf, head of investment analysis at AJ Bell, said the flight from "safe haven" bonds suggests investors were more spooked by inflation and rising interest rates rather than the Ukraine crisis.

“The outlook for bonds does not look good," he said, outlining how while there has been a sell-off this year, long dated bond yields are still looking pretty low when you consider high single digit inflation and the prospect of rapid interest rate rises.

He added that the bond market is also set to lose a "key" piece of price support with central banks in the UK and US looking to scale back and unwind their quantitative easing programmes.

"Bonds can still offer useful diversification for a portfolio, but the risks that have been sitting in the asset class since the financial crisis look like they may be coming home to roost."

Equity funds had a better month, with outflows slowing from £1.6bn in January to £47mn in February.

North America was the best-selling region in equity funds with net inflows of £570mn, followed by global with £319mn.

UK equity funds saw outflows of £989mn, with the majority from UK All Companies which saw £503mn of redemptions.

Cummings said: “Outflows from equity funds calmed in comparison to January, with investors instead focusing on taking money out of bond funds as inflation continued to rise. 

“The full economic impact, including the long-term market impacts of western sanctions and supply chain disruption, will only become clear in the months ahead.”

Gross retail sales for UK fund platforms in the month totalled £13.3bn, a 53 per cent share of the market, compared with through other intermediaries (including IFAs), which was £6.6bn, representing a market share of 26.2 per cent.