While it has only been a week since the U.K. referendum vote, our featured contributor Gabriel Altbach, Pioneer’s Head of Global Strategy and Marketing, took a look at the preliminary fund flow data to see how investors and advisors were reacting.
According to EPFR Global (between 23rd and 29th of June) equity funds redemptions totalled $20bn, the largest weekly outflows since August 2015. However, although undoubtedly significant, redemptions were still less than expected for U.K. and European equity funds. Specifically, much of the withdrawals came from the U.S. equity space ($11.5bn), while European equities lost just over $5bn and U.K. equities around $600mln. Over the last few months, with the polls showing contrasting results and pointing to significant chances of a Brexit, investors seem to have taken a wait-and-see approach.
According to data recently released by Morningstar, after over $75bn of inflows in March and April, May 2016 saw a continuation of the positive sales momentum, with investors globally buying mutual funds totalling nearly $60bn over the month, equally distributed between active and passive products.
Global mutual fund net flows in last 3 months (mln$)
Again based on Morningstar data, investors maintained a predominantly “risk-off” posture, turning their attention mostly to fixed income and money market categories (which saw inflows of around $33bn and $21bn respectively in May), while equity funds saw redemptions of $22bn. The $20bn year-to-date inflows towards funds investing in precious metals can be interpreted as expressing investors’ cautious stance as well. But the overall net sales results were clearly positive, and the data released by Investment Company Institute (“ICI”) on the U.S. market for the first 3 weeks of June confirmed as much, showing net redemptions of equity funds and net inflows into fixed income products.
The trend of favouring fixed income versus equity was common to both the U.S. and Europe, with the latter also showing some propensity to invest in multi-asset and unconstrained/liquid alternative solutions. Overall, multi-asset and alternative funds gathered nearly $7bn in May alone, resulting in total inflows of $25bn in Europe year-to-date.
The uncertainty preceding the referendum seemed to have affected the appetite for U.K. equity funds even before the polls opened. Funds focused on U.K. companies saw redemptions of $4bn in the first 5 months of the year. However, this negative trend was common to U.S. and Euro area equity funds as well. Global equity large cap funds were the only equity category showing significant and consistent positive flows in 2016 (+$52bn from January to May 2016), and could be indicative of investors already leaning towards funds more exposed to companies with global operations and activities, and less subject to the changing dynamics in the UK and Europe.
The highly volatile markets of late will likely continue to weigh on investors’ level of comfort with respect to mutual fund investing; however, whether this will result in significant outflows for the industry depends on whether – and how quickly – policy makers and politicians succeed in stabilising markets.
Against a not particularly exciting investment landscape, with interest rates projected to remain low for a long period of time and equity markets not demonstrating much upside potential, we believe that active management can make a major difference and alpha generation could become more important than ever. In fact, the current market dislocation could create opportunities for active managers to identify undervalued companies and sectors that may be unjustifiably penalised in this phase of market turmoil.
In the meantime, it will be important for the industry to be able to address and manage the risk side of the equation in order to preserve (as much as possible) the stability of investor portfolios. “Brexit” is a strong challenge for all of us, but the active asset management industry is, in our view, well positioned to overcome this and deliver long-term value for our clients.
The additional return above the expected return of the beta adjusted return of the market; a positive alpha suggests risk-adjusted value added by the money manager versus the index.