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December 30, 2019

Monday Morning Memo: Why Investors Sold Equity Funds During a Market Rally

by Detlef Glow.

The year 2019 will be remembered as a good year for equity investors, with the equity markets around the world running up returns in double digit numbers. 2019 will also been considered a good year for the European fund industry since the mutual funds of European promoters witnessed estimated overall inflows of 259.9 bn EUR at the end of November 2019.

By looking at these numbers one would expect that equity funds would have been the drivers for these flows, as stock market gains tend to drive inflows into equity funds. A view on the fund flow numbers in Europe shows that this expectation couldn’t be further away from reality since equity funds witnessed flows opposite to market trends, with investors pulling 23.5 bn EUR over the first 11 months of 2019.

This may raise the question, “Why did European investors sell equities despite increasing markets?” From my point of view, a number of investors were still shocked by the massive downturn in equity markets in the fourth quarter of 2018, so those investors who wanted to participate from a rally at the beginning of the year started to sell their positions after the markets went up in January. The outflows accelerated while the markets returned to their old high marks in March/April 2019. Another dip of the equity markets in May led the investors to sell more equities, as they might expected a new downward trend driven by the trade war between the U.S. and China. As markets bounced back in June, investors returned to equities in July—just in time for the next downturn in equities—which might have eaten up the risk budgets of risk cautious investors and, therefore, caused a peak in outflows from equity funds in August. As the rally on the equity markets continued in September, October, and November, European investors found the confidence to buy equities to participate in these gains.

Graph 1: Fund Flows in Equity Funds (in bn EUR) vs. Performance of the MSCI World NR USD (in %)

Performance of the MSCI World NR USD (in %) vs. flows in and out of equity funds (in bn EUR) in Europe

Source: Lipper from Refinitiv

By looking at these fund flows and market trends, I consider 2019 as the year where a volatile equity rally ate up the risk budget of risk cautious investors and may have caused losses in their portfolios despite the fact that the equity markets had an exceptionally good year. It is easy to say that one simply should have stayed invested in the market, but after the experience from 2018, this is easier said than done—especially when a portfolio is tied to a maximum drawdown or any other kind of risk budget. With regard to this, the year 2019 witnessed once again that only those investors who can stand the volatility will profit in full from equity markets.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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