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Second Wave Fears Keep Investors Cautious

Investors piled back into money market funds and fixed income options in May, Morningstar data reveals, amid persistent fears of a second wave of Covid-19 infections

(Morningstar) Investors sought safety in lower-risk funds as they poured £1.4 billion into their investments in May, latest Morningstar figures reveal. Fixed income and multi-asset funds were among the most popular in the month in a volte-face from the risk-on options investors piled into the previous month

Morningstar's monthly analysis of inflows into UK-domiciled funds shows investor funnelled £954 million into fixed income funds and £757 million into allocation funds. Global bond funds were particularly popular in May as the US Federal Reserve embarked upon more quantitative easing, explains Bhavik Parekh, associate analyst at Morningstar.

But investors have not entirely shunned the stock market, and UK equity income funds enjoyed £280 million in inflows from investors hunting for yield at a time when many companies are cutting their dividends. 

Allocation funds have been relatively stable over the past year; Parekh points out they “are popular with investors saving for their retirement and therefore have less-cyclical flows". 

Elsewhere, alternative funds had their best month since June 2018, despite the fact they still saw heavy redemptions (£431 million). 

Investors Go for Growth

Overall flows to equity funds were almost flat in May, with only £35 million of net subscriptions. However, there was a wide disparity within the group; investors ploughed £892 million into US Large-Cap Growth Equity funds while Global and US Large-Cap Blend Equity categories suffered heavy outflows of £810 million and £629 million repsectively. Europe also remained out of favour, with outflows of £347 million from the Europe ex-UK Equity category. 

The trend towards growth-oriented funds is, perhaps, unsurprising given the continued outperformance of this part of the market. Parekh adds: “Even with a record-breaking bear market and a recession for the United States, US equities, in particular growth and large-cap equities, have performed well, on a relative basis, this year to the end of May.”

The performance of US markets stood in stark contrast with the UK market in 2020 to the end of May, with the FTSE All-Share Index down almost 19% over the period while the tech-focused Nasdaq index has hit new record highs

Yet, while the UK may not be fund investors' most popular choice currently, they are selectively adding to some funds focusing on the region. The Bronze-rated Trojan Income and five-star rated TB Evenlode Income funds, which sit in the UK equity income category, and the Bronze-rated LF Lindsell Train UK Equity and Liontrust Special Situations fund, which sit in the UK flex-cap category, together attracted some £853 million of new money in May. 

Even within Europe, there were pockets of popularity despite the overall outflows from the region. “The category has been unpopular with investors for a while, and over the past 12 months net outflows have totalled to £2.4 billion,” says Parekh.

Here again, the trend of assets moving from value to growth-focused propositions is evident: while the value-tilted Bronze-Rated Invesco European Equity lost £131 million in subscriptions, growth-biased five-star rated Baillie Gifford European and Man GLG Continental European Growth were among the most popular funds in the category in May.

A Cautious Approach

It is clear from the list of most popular funds in the month, however, that the stresses of March's sell-off are not yet forgotten. Money market funds remain the top choices at a time when stock market volatility remains a concern and fears of a second wave of infections are rife. 

Overall, £1.36 billion went into Money Market funds in May, despite the growing likelihood of the Bank of England moving to negative interest rates making the potential returns on these funds underwhelming. 

Among fund firms, Fidelity, Ballie Gifford and Royal London enjoyed the highest inflows into their products in May, attracting £572 million, £467 million and £470 million respectively.

Fidelity maintained its high net inflows from April, helped by the Bronze-Rated Fidelity Global Dividend, which attracted some £214 million in the month. After two months of outflows, Royal London saw a positive turnaround and its money market funds and sustainable range have proved popular among investors, attracting £286 million and £336 million respectively.

Meanwhile, in an environment where investors are looking to allocate to growth strategies, Ballie Gifford is well suited as a growth-orientated house. The Bronze-Rated Baillie Gifford Global Alpha Growth, the five-star rated Baillie Gifford American and Bronze-Rated Baillie Gifford Global Discovery were among the most popular funds in May.

BlackRock's range of passive funds remained popular in the month but as a whole the group saw its first net outflows since February, with both the BlackRock ACS 60:40 Global Equity Tracker and the equivalent 50:50 fund among those to suffer the greatest ouflows of the month. 

Invesco saw its third consecutive month of reducing net outflows, though the monthly total was still high at £706 million. The group announced in May that Mark Barnett was leaving the firm after 24 years, following a sustained period of underperformance for the Negative-rated Invesco High Income and Invesco Income funds he managed. Outflows from Invesco's suite of UK equity income funds have slowed down since their peak in November 2019, which has helped the group overall.

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