Out of the 36 sectors in the Investment Association universe, the IA Flexible Investment sector been dogged by investors consistently pulling out their money over recent months, according to data from the Investment Association.
The sector lost £22m during March 2015, placing it 8th from the bottom of the sales league, and entered its 18th straight month of net retail outflows. The table below shows recent outflows compared with some of the best selling peer groups.
Source: Investment Association
While the month’s outflows are small compared with redemptions elsewhere (IA UK All Companies saw £980.4m walk out of the door), it must be remembered that IA Flexible isn’t the largest of sectors and arguably should be the focus of more attention. 
So why has the IA Flexible Investment sector lost so many investors when it provides access to managers with a wider range of investment opportunities, especially when the direction of markets is looking so uncertain?
Laith Khalaf (pictured), senior analyst at Hargreaves Lansdown, said: “The flexibility of the sector is in principle attractive, giving managers a wider reign in terms of where they can invest, but some funds within the sector will impose narrower limits on investment powers.”
“There are funds within the sector which are essentially global growth funds right down to conservative total return funds, so outflows can’t be attributed to investors either dialling up or dialling down risk.”
Parmenion’s Meera Hearnden agrees that one reason for the outflows is the wide range of funds that the sector covers, which can cause problems for many investors.
“The problem with the sector is that it is very broad in terms of the assets the underlying funds can invest in and in what proportions. This flexibility may put off some investors as it means the focus on risk and volatility can alter considerably over time,” she said.
“However, this flexibility can also be important to enable fund managers to switch in and out of different asset classes so they can add value without restrictions. It seems that this flexibility is not flavour of the month as investors have been focusing on other issues such as the general election and volatility.”
Another reason for the sector’s poor flows could be that it has been overshadowed by popular UK equity income funds and their lure of regular dividend payments. In fact, over the year to the end of March, the IA UK Equity Income took in a net £6.5bn of retail money, according to the Investment Association’s figures.
Chase de Vere’s Patrick Connolly said: “Some investors are probably pulling money out of the [IA Flexible Investment] sector because the performance of many funds doesn’t look particularly inspiring, especially at a time when equity markets have been rising.”
“Most investment managers don’t put their mainstream or most popular funds in this sector and these funds often receive relatively little marketing support or promotion.”
However, Connolly believes that William Littlewood’s Artemis Strategic Assets fund is an exception to the rule as it has been supported by some of the bigger execution-only brokers and is clearly an important fund in the Artemis range.
The £919m fund has 60.5 per cent of assets long equities, with 21.9 per cent in its equities short book. It has 14.2 per cent invested in commodities, has a large short on government bonds and a high cash weighting.
Since the fund’s launch in May 2009, it has outperformed its sector average by 3.16 percentage points, achieving total returns of 78.28 per cent. Given its exposure to the stock market it has shown higher annualised volatility than its average peer over this time.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Ben Willis, head of research at Whitechurch, said: "You are piggy-backing on [Littlewood's] expertise of investing across asset classes. Littlewood is a highly-skilled manager who looks at long-term absolute returns as an objective. Littlewood has a demonstrable track record as an equities manager and an asset allocator."
However, Connolly adds that, on the whole, it can be challenging for financial advisers to incorporate flexible funds into clients’ portfolios.
“The difficulty for financial advisers, rather than recommending individual funds, is how to incorporate flexible investment funds into an asset allocation strategy if there is real uncertainty over how they’re going to be positioned,” he said.
Matt Lonsdale, head of intermediary business development at Thomas Miller Investments, agrees that a bottom-up approach is far more efficient when looking at funds within the IA Flexible Investment sector.
“There are good managers in every sector, but certain managers might not be good for you and if they aren’t you shouldn’t invest with them,” he reasoned.
“Irrespective of sector, some people will want a flexible manager, and others require more focus and control over the mandates they invest in. As a DFM [discretionary fund manager] we are flexible and so if the underlying managers we are using are too flexible they might contract our strategy.”
“For instance, if we were concerned about market uncertainty and reduced our allocation to equities, we would expect the portfolio to be in a position that we were comfortable with, but if one of the managers we were using was more bullish and had the flexibility to significantly increase the equity allocation in their fund we might find the portfolio back to the original position.”
“So to my earlier point, if you have found a good manager, you understand their style and are happy to hold the fund for the long term then a flexible fund might be a useful part of a diversified portfolio.”
Hearnden also thinks that flexible funds can be a good choice, arguing that the wide scope that the managers have can work in the investor’s favour and not just against it.
“This flexibility should be welcomed,” she said.
“Existing long-term investors should not be deterred by a month or two of outflows from the sector. Instead, the focus should be on whether their specific fund is delivering the right returns for their tolerance for risk.”
Connolly admits that, despite the performance of many funds seeming lack-lustre at the moment, there is a strong counter-argument for the sector that in this difficult environment where most asset classes are looking expensive, diversified funds such as many of those in the IA Flexible Investment sector could be a good choice for many people.
“Perhaps many of those who have pulled out, especially if they’ve been chasing stronger performance elsewhere, might come to regret their decisions in the future,” he warned.