Investors were feeling bullish in April, piling £4.8 billion in funds in the month as they tried to capture the stock market recovery. The latest figures from Morningstar show a distinct turnaround in investor sentiment after the sell-off in March, when investors pulled record amounts out of funds.
Active funds were back in favour as investors looked to tap into the best opportunities amid the Covid-19 crisis, and increased appetite for equity funds suggests investors are back in risk-on mode.
“Equity markets started to rise towards the end of March and through April and the US stock markets saw one of its best months in many decades," says Morningstar associate analyst Bhavik Parekh. “This sharp and sustained change in direction gave some investors confidence that the bottom had been reached and, as a result, they invested heavily in risker assets.”
Equity funds were the driving force for fund flows in the month and investors poured £4.9 billion into the asset class in April. UK and US tracker funds were particularly popular. Fixed income funds, in contrast, saw a meagre net inflow totalling £169 million in April, which “didn't put a dent in the £5.7 billion of net outflows seen in March”, says Parekh. After strong performance in March, investors may believe the asset class is unlikely to keep delivering.
Government Bonds saw a second month of outflows as investors withdrew from low risk assets in favour of higher risk ones. Outflows for the asset class for March and April combined totalled £1.3 billion. Once again, it was the Silver-Rated iShares UK Gilts All Stocks Index, which saw the highest net outflow (£281 million); the tracker has lost more than £1 billion in assets in just two months.
Absolute Return Out of Favour
The Alternative-Multistrategy category finds itself with some of the highest net outflows, at £852 million - it is the 30th consecutive month the category, which is home to many of the biggest absolute return funds, has been near the bottom of the pile. Parekh comments: “In an environment where investors are adding risk, alternatives are unlikely to benefit.”
The largest fund in this category, Invesco Global Targeted Returns, has performed well this year considering the environment, marginally in the black with a return just above 0% year to date. However, this was not enough to convince investors to stick around and it bled a further £305 million in April, bringing total net outflows over the past 12 months to a hefty £3.3 billion. Elsewhere, money market funds saw net outflows as investors put their cash back to work in the market.
Best and Worst Morningstar Categories
The UK Large-Cap Blend Equity category enjoyed a second month of net inflows, with investors pouring £2 billion into the group in April. Parekh believes theses funds are popular as investors look to take advantage of depressed markets.
Indeed, the Silver-Rated Royal London Sustainable Leaders fund recorded its best month on record with a net inflow of £398 million. The fund's assets swelled 50% in April, thanks to a combination of inflows and positive performance. With 20% of its assets in US equities, the fund has been a strong performer compared to its peers this year. “Performance year-to-date was also helped by the sustainable mandate of the fund which sees manager, Mike Fox, generally avoid those sectors worst hit during the coronavirus sell-off such as energy and basic materials,” adds Parekh.
The US Large-Cap Blend Equity category was the second most popular of the month, with inflows of £824 million as investors tried to capture the S&P 500's bounceback - the US stock market was up 12.8% in April, one of its best months in history. Passive vehicles were again the preferred choice in this category as active vehicles saw net outflows.
Global large-cap growth equity category saw an overall net inflow of almost £700 million - its popularity aided by the fact the average fund in the group has more than 50% of its money in US stocks. In particular, the Gold-Rated Fundsmith Equity enjoyed inflows of £422 million in the month, after recording net outflows in the first quarter of the year.
The Europe ex-UK Equity category, which had not attracted significant investor interest for almost two years, saw net inflows of £420 million in April – the highest since the end of 2017. “[This] shows that some investors still see benefits to investing in this area of the market,” says Parekh. In particular, the five-star rated Man GLG Continental European Growth Fund, saw a large net inflow of £282 million, attributable in part to its high-growth tilt.
Meanwhile Global Equity Income bled £239 million. “The category has performed poorly in recent years as a result of a mismatch between the stocks that have good dividends and those that have driven market performance,” says Parekh.
Active and Passive Funds
Increased interest in UK and US equity trackers in April was good news for BlackRock and Vanguard. The fund giants recorded inflows of £1.1 billion and £574 million respecitively in the month.
Meanwhile, active houses Baillie Gifford and Fidelity also saw strong investor interest. However, the two-star rated Baillie Gifford Emerging Markets Bond bucked that trend with significant outflows, shrinking 22%. “Emerging market bonds have been an area of financial markets that have come under extra strain in recent months,” says Parekh.
Invesco continued to see high net outflows in April (£766 million), bringing its total net outflow over the past 12 months to more than £10 billion. Consistent outflows and poor performance from some of the firm's UK equity funds has now seen beleaguered fund manager Mark Barnett leave the business. He had overseen the Invesco Income and Invesco High Income funds since 2014. Under his tenure, assets in the Invesco Income fund shrank from £8.3 billion to £1.5 billion.
“Retention of assets has been a problem at Invesco for some time. Over the past two years it has seen an average of £663 million of net outflows from its funds every month,” says Parekh.
Schroders, which saw net outflows in recent months, lost £266 million in subscriptions in April. Parekh expects the departure of James Sym, lead manager on the Schroder European Alpha Income range of funds, is likely to have a significant negative on flows. Sym has moved to River & Mercantile where he will head up a new range of European-focused funds.
