Retail fund sales fell sharply last year to £7.2 billion, and the only time in recent history that the figure has been significantly lower was during the financial crisis of 2008. The institutional data was even worse with net outflows of almost £13 billion, which suggests that investor sentiment is about as negative as it can get.
When you look at the quarterly retail data for 2018, the trend is obvious: each quarter gets weaker and weaker until the figure turns negative in the final three months, with total net withdrawals of just under £6 billion.
UK equity funds were the biggest casualty
|Master Investor Magazine
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No prizes for guessing that UK equity funds were the biggest casualty. Since the vote to leave the EU the asset class has seen net retail outflows of £5.1 billion in 2016, £3.0 billion in 2017 and £4.9 billion in 2018. The UK All Companies sector has now been the worst-selling area for five years on the trot, although it remains the largest by funds under management with 14.9% of the total assets.
European equity funds also saw net outflows in 2018, although equities as a whole recorded a small inflow of £144 million, which suggests that retail investors have re-balanced their asset allocation in favour of Asian, Global, Japanese and US equities.
The £1.4 billion of retail money that went into Asian equity funds last year was the biggest inflow into the region in the last decade. This appears to be a sensible move, as many analysts believe that the Asia Pacific markets look attractively valued according to the long-term metrics.
Another popular area were the mixed asset funds, which saw annual net retail inflows of £7.9 billion. These probably benefited from their ability to reduce risk by diversifying across different asset classes.
£2 billion of outflows from fixed income funds
The other significant change was the £2 billion of outflows from fixed income funds, which was undoubtedly a direct result of the co-ordinated action by many of the world’s major central banks to tighten monetary policy.
People are clearly nervous, yet it didn’t stop index tracker funds from having another successful year, with net inflows of £8.9 billion. These passively managed products continue to gain market share due to greater investor awareness and keen pricing competition within the sector, although if there was a significant sell-off there is every chance that the growth could unravel and add to the drama.
If the country leaves the EU without a deal, the markets could turn nasty with illiquid sectors such as UK Direct Property funds being particularly at risk. Many of these vehicles had to suspend dealings in the wake of the mass outflows after the referendum, which probably explains why prudent investors withdrew £228 million from the sector in December.
Putting fresh money into a UK equity fund so close to the Brexit deadline of 29 March feels more like a gamble than an investment, although there is no doubt that parts of the market are extremely unfashionable and would probably bounce back quickly in the event of an orderly withdrawal. Many domestically oriented stocks offer real value for those adventurous enough to take the chance, although the more risk averse should make sure that they are well diversified across the different geographies and asset classes.