Financial advisers seem to have made a sharp move to cash in weeks before the UK’s in/out referendum on the European Union, as new data shows a jump in the amount of research being carried out on IA Money Market and IA Short Term Money Market funds. 
The year to date has been a challenging one for investors, with the FTSE All Share dropping at the start of 2016 owing to low commodity prices, slowing growth in China and concerns about the efficacy of central bankers’ toolboxes.
While there was something of a rally from mid-February onwards, conditions turned more turbulent in recent weeks as the UK geared up to vote on its future relationship with the EU – and opted to depart the currency bloc.
Against this backdrop, the FTSE All Share is down 1.38 per cent while the average IA UK All Companies fund has lost 6.52 per cent. The IA Money Market sector’s 0.12 per cent gain looks relatively attractive in this context.
Performance of sectors and index over 2016
Source: FE Analytics
FE’s Market Intel tool allow us to see which funds professional investors have been researching through FE Analytics, offering some insight into the areas financial intermediaries have been focusing on an avoiding over a given period.
The below table shows the 10 most research funds from the Investment Association universe from the start of the year to the end of May.
Source: FE Analytics Market Intel tool
The likes of Standard Life Investments Global Absolute Return Strategies, CF Woodford Equity Income, Invesco Perpetual High Income, Fundsmith Equity and Stewart Investors Asia Pacific Leaders topping the table is nothing strange.
After all, these are some of the largest members of their respective sectors and will be found in many advisers’ portfolios. In fact, many of these funds tend to always be found in the list of most research on FE Analytics regardless of the time frame looked at.
However, a look at the period between 1 June and 23 June, the day of the Brexit referendum, shows a very different picture: the top 10 is now dominated by funds from either the IA Money Market and IA Short Term Money Market sectors.
Source: FE Analytics Market Intel tool
Rob Gleeson, head of FE Research, said: “Despite last week’s results coming as a shock to many in the industry, it’s interesting to see that professional investors were already looking at options to cushion any shocks."
“Following the vote to Leave, we’re in a period of extreme volatility – and therefore capital protection is likely to be key for advisers and their clients. Considering the current climate, cash funds will be attractive to many.
"But it is worth remembering that cash does have some pitfalls. The most recognisable one currently is if inflation spikes (which it might following the fall in the value of the pound) then investors will see the value of their capital in cash funds take a hit.”
The days following the election were much the same in terms of the funds that advisers were researching. While the order of the funds’ popularity might have changed a little (although BlackRock Cash remains at the top), all of the top 10 are from the two money market sectors.
Over on Fidelity’s FundsNetwork platform, there was a similar move towards safety in May with the IA Sterling Corporate Bond sector being the best selling peer group followed by IA Money Market and IA Short Term Money Market. AXA Sterling Credit Short Duration was the most popular individual fund.
Danny Wynn, head of fund partners for Fidelity International, said: “With pre-referendum uncertainty dominating investor thoughts, it is no surprise that we saw them pile into the relative safety of fixed income and the money market sectors in an attempt to shield their portfolios from the volatility.”
“While it’s likely we’ll see investors continue to adopt a risk off approach and allocate towards safe haven assets following the UK’s decision to leave the EU, once the dust settles and the initial volatility recedes we expect to see advisers and investors re-enter equity markets looking for value.”
“As a result there is a possibility we could see investors making some tactical allocations into more diverse range of assets over the next few months.”
In fact, cash portfolios account for 19 of June’s 20 most researched funds on FE Analytics.
Standard Life Investments Global Absolute Return Strategies is the non-cash fund on that list, but it is still regarded as an option for a more cautious stance.
The IA Targeted Absolute Return fund aims for a positive return regardless of market condition; the FE Research teams says “risk management is in the DNA of the fund and every strategy is viewed in terms of its contribution to risk”.
Performance of fund, sector and indices over 2016
Source: FE Analytics
The £26.4bn fund has a strong track record over the longer run (it’s up 21.88 percent over five years) but has struggled over 2016 so far. During the first three months of 2016, the fund went through its worst quarter since the peak of the financial crisis in 2008 after falling 3.5 per cent.
As mentioned, Standard Life Investments Global Absolute Return Strategies is often the most researched fund by investors. If we look outside the top 20, it appears financial intermediaries continued to favour the same funds as before.
Fundsmith Equity is in 21st place. The fund is in the first decile over 2016 to date and has made 6.15 per cent since the referendum result was announced, thanks in part to the relative strength of the dollar over sterling.
Other non-cash funds that advisers showed the most interest in over June include CF Woodford Equity Income, Invesco Perpetual High Income, Stewart Investors Asia Pacific Leaders, Newton Real Return, Jupiter European and Newton Global Income.
