Trackers captured their highest ever net retail sales last month as £938m poured into passively managed funds in March, according to the Investment Association, and FE data shows that funds which concentrate on European and US equities received the lion’s share of the inflows.
Statistics from the Investment Association show that while net retail sales into open-ended funds were £1.2bn lower last month than one year earlier, tracker funds were one of the main areas of growth.
The fund management trade body showed that this time last year flows into trackers were £238m – accounting for 9.8 per cent of the overall share of the industry’s funds under management – and that figure has increased by close to four times, meaning that passively managed funds now represent 11.5 per cent of all the assets in the Investment Association universe.
One of the clear beneficiaries of this trend has been European equities, according to the market movements tool on FE Analytics.
Our data shows the passive portfolio which has attracted the most money over the past month has been the BlackRock Continental European Equity Tracker – which has seen its AUM surge from £2.9bn to £3.2bn over the past four week thanks to inflows of more than £160m.
The L&G European Index fund also features high up the list, as the table below shows, though its inflows were substantially lower.
Source: FE Analytics
This data is supported by the Investment Association’s report, as it shows that European funds in general attracted the most amount of flows last month at £663m, which is significantly higher than its average net sales over the previous 12 months of just £11m.
This money seems to have poured out of UK funds, however, as they saw net retail outflows of £963m – making it a record poor month for the sector. The IA UK All Companies sector was that driver of those outflows, given £980m poured out of a peer group last month, which again is a record.
It is easy to understand why European trackers have proved to be so popular, though.
While investors have had to deal with the growing uncertainty surrounding the UK’s general election, the European Central Bank has embarked on its ambitious quantitative easing programme in order to improve economic growth and stave off the threat of deflation.
As a result of the added liquidity, the MSCI Europe ex UK index has returned 9.45 per cent year to date, meaning it has outperformed both the MSCI AC World index and the FTSE All Share in the process.
Performance of indices in 2015
Source: FE Analytics
The consensual view is that outperformance is set to continue throughout the year as well, even though concerns about a ‘Grexit’ from the eurozone continue to rumble on.
In a recent poll conducted by Henderson Global Investors, 70 per cent of listeners during the Henderson Global Equity Income fund’s quarterly update web call thought that Europe would be the best performing region this year.
Andrew Jones, who has managed the £741.1m fund since April 2009, agreed with his listeners.
“I think [European] companies will get a good benefit in due course from QE, the falling currency is going to help as the year goes on and I think banks will become more confident lending as credit conditions get better so I think that is going to be the case.”
“That’s the way the fund is positioned at the moment, so I hope the majority is right.”
A tracker which focuses on Japanese equities, another region which has got off to a flying start in 2015 thanks to central bank QE, also features high up the list in the form of BlackRock’s £3.4bn Japan Equity Tracker fund.
While BlackRock Continental European Equity Tracker has topped the best-selling list, it has only received a two FE Passive Fund Rating – which is the most extensive rating system of index trackers funds in the retail industry, allowing investors to objectively compare conventional trackers and exchange traded funds (ETFs) with each other for the first time.
European passives which hold the highest FE rating of five include the iShares MSCI Europe ex-UK UCITS ETF, Lyxor Index Euro Stoxx 50 and Vanguard Eurozone Stock Index fund.
While investing in Europe at this point in time may make sense, the fact that two US trackers – Fidelity US Index and BlackRock US Equity Tracker – have attracted the second and third most amount of money over the past month is slightly more confusing given the recent strong performance, high valuation and experts’ concerns over the country’s stock market.
According to FE Analytics, the S&P 500 is the only developed equity market index to have delivered positive gains in each of the last six calendar years since the 2008 financial crisis. The index has returned 138.59 per cent since January 2009, comfortably beating UK, European and Japanese equities in the process.
Performance of indices since Jan 2009
Source: FE Analytics
However, that has left the index trading on a P/E ratio of more than 20 times.
A number of leading fund managers now say it is very overvalued and are therefore looking for other opportunities – such as Schroders’ Marcus Brookes, who told FE Trustnet at the end of last year that the US equity market was due a poor period of performance following its stellar gains and recent euphoria.
“You’ve had nearly 40 new all-time S&P highs just this year [2014]. In quarter one, there were the highest level of IPOs since the internet bubble and 74 per cent of those companies have no earnings. Extraordinary, isn’t it?” Brookes said.
“The bull market is now 67 months in length. The stock market has been up a very, very long time now.”
FE Alpha Manager Geoff Legg, manager of the Kennox Strategic Value fund, went a step further.
“The perfect environment for an overheated US equities market has developed. This is an area to avoid for investors with long-term horizons,” Legg said in January.
Nevertheless, the Fidelity US Index and BlackRock US Equity Tracker funds – which were both launched in 2012 and therefore don’t have a long enough track record for an FE Passive Fund Rating – have seen inflows of more than £100m over the past four weeks.
An interesting development over the past month is that the L&G Global Inflation Linked Bond Index fund has been the fourth best-selling tracker, attracting inflows of close to £100m taking its overall AUM to £215m.
Despite the UK CPI’s current level of 0 per cent, the fact the eurozone is teetering on the edge of deflation and concerns about a global deflationary scare persist due to the oil price, over capacity in the economy and high debt levels, money has flowed into the newly launched fund.
While many would argue this is a poor move, FE Alpha Manager Martin Walker recently told FE Trustnet that investors need to start prepping for higher inflation now.
“The key driver for inflation is services, rather than goods, and we are seeing wage growth inflation in the UK and I think that will start to feed though and cause the CPI to tick up,” Walker said.
Nevertheless, FE data shows investors are ignoring this predicted inflation shock given that traditional fixed income tracker funds such as BlackRock’s Corporate Bond Tracker and UK Gilts All Stocks Tracker funds are among the top eight best-selling passives this month.