Retail investors in the UK placed a collective £18.4 billion in UK funds in the first half of 2017, representing the highest level of net sales in the first half of any year on record, according to new figures from the Investment Association.
The total amount invested in funds now stands at £1.1 trillion.
While all asset classes saw increased retail investment over the past six months, mixed asset funds attracted the largest inflows, totalling £5.7 billion. Equity funds recovered from a negative 2016 with net inflows of £4.1billion, while fixed income funds attracted £4.2 billion worth of investment.
‘These figures show that UK investors are doing the right thing by saving for their future,’ said senior analyst at Hargreaves Lansdown Laith Khalaf. ‘With cash still returning next to nothing and bond yields still low, the stock market still represents an attractive option for investors seeking long-term returns ahead of inflation.’
However, noted Adrian Lowcock, investment director of Architas, while ‘the headline figures suggest that animal spirits have returned to markets,’ a closer look at the figures suggests a growing ‘cautious tone amongst investors,’ with many increasingly favouring relatively defensive investment positions.
Concerns over global stock values reaching their peak have resulted in investors ‘holding defensive assets including absolute return funds to protect themselves in the event of a correction or sell-off,’ Lowcock noted.
Indeed, targeted absolute return funds were the most popular individual sector for retail investors over the past six months, attracting a net inflow of £2.2 billion since the start of the year. Their popularity has persisted despite the fact that many in the sector have failed to keep up with inflation or even to preserve investors’ initial capital. Over the same time period, investors put £1.8 billion in the strategic bond sector and £1.6 billion in global equity sales.
The trend towards increasingly defensive positons among investors was also shown in the data for the month of June. As Jason Hollands, managing director at Tilney Investment Management, noted: ‘The areas that have attracted the greatest inflows in June were not equities, but the oft-perceived “safe havens” of fixed income (£1 billion), mixed assets (£905 million) and money market funds (£237 million).’
At the same time, investors are increasingly sour on UK equities, which experienced a £1.1billion net outflow across the three main fund sectors in June. This, Khalaf said, ‘suggests that there isn't a great deal of confidence over the domestic market, and that investors think better opportunities lie overseas.’
According to Hollands, this divestment from the UK ‘may well reflect concerns around the fragile UK political situation and especially the uncertainties around Brexit, of which we are continuing to endure a daily diet of gloomy warnings.’
However, he noted, the shunning of UK equities is based on confusion among many investors. Specifically, fears over the UK economy should not necessarily translate into fears over the performance of UK equities.
‘It is perhaps not widely understood that the relationship between domestic UK growth and the UK stock market is extremely tenuous, as the UK market is highly international in nature, with the FTSE 100 in aggregate having more revenue exposure to both emerging market regions and continental Europe than it does to the UK,’ explained Hollands.
Instead, the high exposure of UK companies to foreign markets combined with the current weakness of the pound may ‘actually benefit UK-listed companies with international earnings,’ said Hollands. ‘The shunning of UK equities therefore seems unwarranted.’
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