Casualties in the great £6bn investor exodus

Once highly favoured income funds, absolute return funds and now property unit trusts are emerging as prime casualties in the continuing investor exodus from the stock market.

Figures released last week show retail investors pulled £6 billion from funds in the last three months of 2018 – the largest quarterly exodus on record. The exodus dragged down annual net sales (purchases less pull-outs) to just £7.2 billion last year, far south of the £48.5 billion of net new investment recorded in 2017.

Now there are fears that open-ended commercial property funds could be at risk. The Financial Conduct Authority is said to be monitoring a rise in investor withdrawals, sparking fears that this could lead to a repeat of previous periods when many property unit trusts were forced to suspend trading, temporarily preventing investors from taking out their money.

I wrote here last week of how the great investor exodus has resulted in a surge of money going into easy access bank accounts – those paying little or no interest. Ironically the market recovered during January, pushing the FTSE 100 back above 7,000.

Hargreaves Lansdown senior analyst Laith Khalaf has labelled the year an “annus horribilis” for the fund management industry. Citywire has set out figures compiled by analysts at Numis Securities, using data from Morningstar, showing which funds have been worst hit by the exodus. Six funds focused on the domestic stock market were among those to suffer redemptions of more than £1 billion.

It’s not just Brexit fears that are to blame. Funds managed by star manager Neil Woodford are among the worst hit after marked underperformance in recent years. Investors pulled £2.4 billion from the Woodford Equity Income fund last year. Citywire also notes that investors have taken flight from his successor, Mark Barnett, who has also suffered a long period of underperformance. They pulled out a combined £2.5 billion from his Invesco Income and High-income funds in 2018.

Other funds to suffer notably are Axa Framlington UK Select Opportunities and ishares UK Equity Index tracker (£1.5 billion withdrawn).

But these withdrawals are dwarfed by the £8.3 billion pulled from the once high-flying Standard Life Investments Global Absolute Return Strategies (GARS) fund. Time was when this fund was one of the most popular among independent financial advisers, appearing to offer diversification, professional investment management and capital protection in a volatile period for global markets. GARS has now topped the pull-out table for the second year running. Assets have tumbled from their peak £27 billion to £11.3 billion by the 2018 year-end.

Citywire analyst David Stevenson ploughed through the 2018 results of 102 absolute return funds – and the results were none too reassuring for those who looked to those vehicles for stability and protection. After all, many of these funds used hedging strategies to cushion the funds from sharp market gyrations.

Only 12 of the 102 that have reported 2018 results achieved an absolute positive return. And five reported losses of 10 per cent or more. Moreover, many have struggled to achieve a consistency of returns, begging searching questions as to how investors can secure more reliable protection – difficult as this is in volatile markets and particularly so when sentiment is heavily influenced by politics.

Property has long been seen as an acceptable alternative asset, and it makes sense in terms of asset diversification. But some forms of collective property investment such as open-ended property unit trusts are vulnerable to sharp changes in sentiment and a rush of withdrawals that can oblige funds to hold high levels of liquidity. The response, as in 2016, is to suspend withdrawals. This can protect investors from panic selling in a temporary downturn. But no investor wants to feel locked into an investment from which they cannot readily withdraw.

Closed end investment trusts are not so vulnerable. As Alan Brierley, head of investment company research Canaccord Genuity explains, illiquid assets are not suited to the open-ended mutual fund format. To deal with the risk that people might want to take their money out, they are obliged to hold large amounts of cash and that erodes their returns. “When we have a more risk-off market”, he adds, “what we tend to find for investors looking to take their money out, that managers are forced sellers. They’re having to invest in very buoyant markets when prices are moving against them and exactly the same happens on the opposite side. They’re basically forced sellers of assets in a market where there’s not many bids.”

When turbulence hits, there’s no easy hiding place. Diversificationisstillthewatchword for investors – that, and the patience to take a minimum three- to five-year view.