September 8, 2020

The Year of the Virus: Where has the Money Gone?

by Dewi John.

I think we can agree that it’s been rather an eventful year so far. “Unprecedented” has been an overused phrase in market commentary and, in defence of those of us who make such comments, not without due cause.The FTSE 100 plummeted by more than 8% on 9 March—its biggest fall since 2008. The index bottomed out on 23 March, at below 5,000, having shed more than a third of its value since its recent peaks in mid-January. Over the summer, it’s ground higher to trade broadly between 5,800 and 6,500.

March was the turning point. During the depths of the crisis everything sold off, even the safe havens of developed market government bonds and gold, as investors desperately sought security in cash before central banks stepped in with promises of inexhaustible largesse to calm markets.

How has the U.K. fund market shifted over the course of the year? I’ve used Refinitiv Lipper fund-flow data to see how investors have reacted to these (ahem) unprecedented events, looking first at broad asset classes, then drilling down into particular Investment Association sectors.

Graph 1: UK Fund Flows by Asset Type, January to August 2020 (£m)

Source: Refinitiv Lipper

Cash is King

Whiplash swings in sentiment were reflected in Money Market flows. Some £1.54bn poured into these funds in the first quarter of the year—more than £1bn in March alone. In April, the trend unsurprisingly reversed, as investors sought to put the cash back to work, with Money Market redemptions of £830m. Assets continue to flow back out of the sector, though it’s worth noting that the large shift in June is largely the result of the closure of one fund’s Z-share class.

Bonds saw the biggest movements in absolute terms, with about £7.39bn exiting the asset class over March alone. Temporarily belying their reputation for being “risk free”, £1.53bn of this was from gilts—both plain vanilla and index-linked—as investors just wanted to cash out. In contrast, £1.24bn divested from U.K. Corporate Bonds over the same month, despite the sector being considerably bigger (£66.3bn v £28.6bn for gilts and linkers combined, as of December 2019). Given their greater liquidity, exiting gilts was a less costly first port of call.

Overall, investors have put less back into bond markets since March than they took out, with £7.6bn exiting in February and March, and £5.4bn redeployed thereafter. In terms of overall losses (capital appreciation/depreciation plus net flows), two of the hardest-hit bond sectors have been Strategic Bonds (dropping £35.8bn to £31.6bn between December and July) and Global Emerging Markets local currency (from £2.84bn to £1.5bn).

No Staycation for Equities

Equities, as well, have yet to return to their pre-COVID volumes, losing £51.6bn between December and July, down from £182.5bn. However, aggregate flows over the year have been positive, with the shortfall being down to capital losses.

What’s interesting is that the largest rush out of equity funds wasn’t in March, but June, when £2.76bn of assets went looking for a new home. This is more than double the outflow from the asset class over the whole of the first quarter. Breaking this down into its IA sector components reveals something of a curate’s egg. U.K. All Companies, U.K. Equity Income, and U.K. Smaller Companies were all big losers over June (£1bn, £750m, and £156m outflows, respectively). Yet Global, Asia Pacific ex-Japan, and North America sectors did rather better, taking in £522m, £186m, and £197m, respectively, indicating that if Brits couldn’t go abroad at this time, they were happy enough for their investments to do so. That said, this was selective, with Global Equity Income seeing further outflows (£237m), demonstrating that equity income is currently out of fashion from wherever it hails. The three main U.K. equity sectors have continued to see assets drain from May to August.

North America, on the other hand, has gathered assets over the course of the year, swelling from £64.3bn to £68.2bn, despite its main indices having fallen year-to-date, except Nasdaq, which is in the black. This indicates that investors see the world’s largest market as the place to be in such fraught times. Its small-cap sector has about the same amount of assets now as when the year started, faring rather better than its U.K. equivalent.

Other equity sectors that have grown over the course of the year include Asia Pacific ex-Japan and Global. Conversely, domestic and European equities are all down. Reasons for this, of course, will be various. The weaker greenback, however, combined with Asia’s relatively strong growth characteristics alongside the generally faster recovery of its economies from the initial impact of COVID-19 are doubtless some of the factors at play. On the other hand, the strengthening euro, plus Europe and the U.K.’s relative lack of fashionable growth stocks, won’t have worked in either region’s favour.

One remarkable point is that while U.K. All Companies, Equity Income, and Smaller Companies have seen their assets under management (AUM) fall over the course of the year, for the latter two sectors it’s been because of capital loss and net flows, with Equity Income falling from £53.7bn of assets in December to £39.5bn over the year to July. All Companies has actually seen net inflows over this period. Who the main beneficiaries have been, and why, is something we’ll look at further down the line.

Mixed Assets’ Mixed Fortunes

Mixed Assets sold off heavily in March, having stayed in positive territory over February, unlike Bonds and Equities. As you can see from the chart, its redemptions were greater than equities in March; however, in the June sell-off it suffered some, though less, collateral damage. Almost half of the broad class’ March losses were in one sector—Targeted Absolute Return—down £799m out of a total of £2.2bn. Assets continued to haemorrhage from the sector over April and May, with the worst drop coming, as with equities, in June, when investors redeemed almost a billion. It’s worth noting that, excluding Targeted Absolute Return, Mixed Assets had a positive June. The sector has had an abysmal year, with a net £2.4bn seeking pastures greener. Digging down further, £1.92bn is from one fund.
There’s an interesting trend visible with the three Mixed Investments sectors, as investors abandoned the middle ground: the 0-35% Shares sector has taken in £795m of assets over the year; 40-85% Shares, a touch under £4bn, whereas 20-60% Shares has lost £961m, with the biggest redemptions—£494m—coming in March.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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