Asset Allocator: May2015: Following the Money, Focing on Flows

In his latest weekly Asset Allocator post, David Stevenson attempts to make sense of where private UK investors have been placing their money in the first half of 2015 by examining fund flow data. David looks at a series of reports to examine which funds look strongest and how investors behaviour is changing.

 The content of Asset Allocator is provided by David Stevenson, an independent financial journalist. The views expressed in this page are those of David Stevenson only, and Societe Generale takes no responsibility for his views. The views expressed are David Stevenson's views as of the date of publication only. Neither David Stevenson nor Societe Generale accepts any liability arising from investment decisions you may make for your own account. This material is intended to give general information only and is not to be construed as investment advice. The investments mentioned may not be suitable for everybody and you should ensure that you fully understand the investment you intend to make before making an investment. Links to external websites are not operated by or affiliated with Societe Generale. While we aim to point you to useful external websites, we cannot be responsible for their content or accuracy. Societe Generale takes no responsibility for the views expressed on any external websites or any liability arising from investment decisions you may make. You should seek professional advice if any of the content of this page is unclear. 


ASSET ALLOCATOR: MAY 2015

11/05/15- Following the Money, Focusing on Flows

 

In this week’s short note I want to return to a familiar subject – following the money and examining what it is investors are currently parking their assets in at the funds level. I’m going to use two metrics, the recently released retail funds flow data for open ended funds in the UK and more briefly a recent report by Source ETFs which examines the take up of ETFs throughout the institutional space in Europe.

The main focus of this article is to in effect peer over the shoulder of the UK private investor and unpack what it is they’ve put their money in. At a global scale, data on ETFs is usually the best way of examining investor sentiment but these huge numbers don’t tend to tell you very much about the humble UK based private investor. The best way of understanding these trends is not to look at ETFs – where institutional flows are hugely powerful – but at retail sales of unit trusts, tracked by the industry association the IMA.

A recent report from analysts at investment bank Numis took this IMA data and provided a very useful overlay of analysis which I find absolutely fascinating. The big messages from the data? 

  • ISA season – a bit of a damp squib. According to Numis “the ISA season rush failed to materialise in March as net retail flows into UK open-ended funds were £1.1bn, which compares to £2.5bn in the same month last year, according to figures released by the Investment Association. This followed two relatively subdued months of £220m and £990m in January and February, respectively “
  • Record net outflows from funds that invest in UK equities. UK Equity funds experienced their largest ever net outflows of £963m, driven by net sales from UK All Companies (-£980m) and UK Smaller Company (-£161m) funds.

  

 

 

 

 

 

 

 

 

 

 

 

 

  • This UK sell off even extended into small cap funds.

 

  • Defensive focus on property funds and absolute returns funds. “Demand remained strong for Property (+£294m), which has seen 26 consecutive months of net inflows, as well as Absolute Return (+£293m), Bond (+£245m) and Mixed Asset (+£195m) funds".   

Net Flows by Asset Class – Mar 15 vs Previous 12 mths:

 

  • Adventurous types betting on Eurozone. European funds saw record net retail sales of £663m while demand remained positive for Global (£264m) and Japan (£105m) - t North American funds saw net retail inflows of £117m, following two months of net outflows. 

 

Source: Investment Association

  • Tracker funds are becoming hugely popular. Tracker funds saw record net inflows of £938m, and now have assets of £100.9bn, representing 11.5% of the overall industry’s assets, compared to 9.8% in March 2014. 

Chart : Rising Demand for Tracker Funds

 

Given these big fund flow trends, what would be my takeaways for ETF based investors?

Now that the General Election has surprised us all by installing a majority Conservative government, I’d expect those UK fund flows to start to reverse, with reasonably heavy buying by UK focused equity income fund managers. On an asset class by asset class level, I’d be growing more cautious about deploying new money into more defensive funds (property springs to mind) if only because share prices in this segment are now beginning to look more than a little stretched. Lastly in terms of funds I’m struck by the relentless rise of the open ended tracker fund – paralleling the remorseless rise of the exchange traded fund. The numbers really are quite remarkable and I wouldn’t be surprised to see retail tracker sales in the UK pushing past £1.5 billion on a monthly basis in the UK within the next two years. Crucially I also think the day when passive funds outsell actively managed funds on a month by month basis is now likely to happen a lot sooner than we all first thought. 

So given the relentless rise of passive funds its worth mentioning one other study, this time for ETF firm Source looking at institutional usage of listed funds. This London based asset manager talked to 750 professional investors across 11 European countries about their current and planned use of ETPs/ETFs.  According to Source “each of those interviewed are responsible for at least £50 million worth of private client investments or £100 million of institutional assets”.  

The key findings were as follows:  

  • “More than two-thirds (68%) of professional investors and advisers in Europe are currently using ETPs in the portfolios they manage, while a further 22% have used them in the past"
  • When asked what products were most likely to be in their top three holdings, ETPs were mentioned first by 34% of respondents. This was the highest percentage with “first mentions”. In total, two-thirds said that ETPs were among the top three products used
  • Overall, investors estimate that around 10% of the assets they help manage are in ETPs
  • 78% of those interviewed said they do not plan to use ETPs less, and 39% intend to use more over the next 12 months. 
  • Overall, the findings reveal an expected net increase of 32% in the use of tracker ETPs over the next year, whereas the corresponding figure for actively managed ETPs is 6%

Again, I think we can reach a very simple conclusion – passive ETFs are absolutely becoming mainstream in the institutional space within Europe. Takeup of ETFs amongst private UK investors is also growing although the absolute levels are still fairly low when compared to direct share ownership, but the trend is firmly established. This slow but steady eating into active fund management will I think have a very positive effect especially at the institutional level – big professional buyers of funds will demand more from their managers. That means we’ll see more pressure to ‘prove’ the active alpha provided by the manager…and pay less for the privilege! This changing emphasis will be excellent news for the humble private investor, as we’ll eventually benefit from this structural reform, with competitively priced funds clearly differentiating their investment appeal against what will increasingly be the mainstream ‘passive’ alternative. 

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The content of Asset Allocator is provided by David Stevenson, an independent financial journalist. The views expressed in this page are those of David Stevenson only, and Societe Generale takes no responsibility for his views. The views expressed are David Stevenson's views as of the date of publication only. Neither David Stevenson nor Societe Generale accepts any liability arising from investment decisions you may make for your own account. This material is intended to give general information only and is not to be construed as investment advice. The investments mentioned may not be suitable for everybody and you should ensure that you fully understand the investment you intend to make before making an investment. Links to external websites are not operated by or affiliated with Societe Generale. While we aim to point you to useful external websites, we cannot be responsible for their content or accuracy. Societe Generale takes  responsibility for the views expressed on any external websites or any liability arising from investment decisions you may make. You should seek professional advice if any of the content of this page is unclear.

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