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UK retail investment funds are heading for their first full year of contraction in more than a decade, including during the financial crisis, with withdrawals already at £25.8bn in the 10 months to October.
Funds have seen net monthly outflows for most of this year, with modest outflows only recorded around the end of the financial year in April, when some investors top up their tax-free Isa holdings, according to data released this week by the Investment Association, an industry body. institution.
Uncertainty in an environment of rising interest rates, high financial asset prices, inflation and recession gripped the market. Also in 2008, net retail sales were positive at £4.8bn. Last year net sales were £43.6bn.
“We typically see retail flows turn net negative in periods of volatility or crisis,” said Sarah Ruggins, head of multi-asset research at wealth manager St James’ Place. She cautioned investors against trying to time withdrawals, saying “the biggest rebounds come right after the biggest drawdowns”.
Outflows are broadly based on equity, fixed income and money market funds. Despite month-on-month withdrawals falling to £3.7bn in October, the sell-off continued for all major asset classes, apart from passive funds.
October figures suggest the market has stabilized somewhat since the gilt crisis sparked by former prime minister Liz Truce’s September “mini” budget, although the cost of living crisis and a price slowdown next year are weighing on consumer confidence.
Sell-offs in equity funds reached £17.3bn in the first 10 months of the year, with September the biggest single month of withdrawals during the period at £4.95bn. Short-term flows between asset classes suggested a growing appetite for passive funds, with net inflows of £1.4bn in October.
Outflows of £4.5bn to European equity funds were higher than those in Asia and North America, as investors worried about the impact of Russia’s invasion of Ukraine.
“Options, bonds and equities have had a rough time of the year so far, and there are few places to hide, even for ‘cautiously’ positioned funds,” said Dzmitry Lipsky, head of fund research at trading platform Interactive Investor.
Low-risk portfolios haven’t been a sure source of returns for investors this year, with Vanguard’s Life Strategy 60% Equity Fund down 7.49 percent year-to-date, having experienced double-digit returns in two of the previous three. year
As withdrawals are concerned, some investors need ready access to capital, Ruggins said. She noted that individuals’ portfolios should be better diversified for lower risk exposure and short-term weather perturbations.
Central bankers’ appetite for more monetary tightening next year has investors wary of potential market turmoil affecting returns after the bond market rout in the fall.
However, analysts suggested that UK government and corporate bonds were reset after a decade of stable yields came to an abrupt end due to a rise in interest rates. Newly-enhanced returns available on bonds can be attractive, they said.
“While conditions are changing, the high interest rate environment means investing in bonds will be more attractive than it has been in the past decade,” said IA chief executive Chris Cummings.
“Investors will need to navigate the changing investment landscape, and we may see further changes in fund flow patterns,” he added.
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