The figures have revealed a marked-turning point in recent behaviour by retail investors, with net sales of equity funds turning positive (£563m) for the first time in a year, a period over which supposedly more defensive areas, notably ‘absolute return” funds have proven popular while stock-market funds and UK equity funds in particular have been widely shunned.
Indeed by some accounts 2016 was the worst year for equity fund flows since 2008, the height of the global financial crisis.
Bestselling sectors in November 2016
| Investment Association Sector | Ranking | Net retail sales |
| Targeted Absolute Return | 1 | £366m |
| Global | 2 | £220m |
| Mixed Investment 40-85% Shares | 3 | £183m |
| North America | 4 | £168m |
| Mixed Investment 0-35% Shares | 5 | £155m |
Source: The Investment Association
Ironically, however 2016 proved to be a year of strong returns for equity markets, in particular for sterling based investors as a result of the weakening Pound. Conversely, many absolute return funds disappointed in 2016.
This data clearly suggests that many retail investors have put the doom-laden predictions around the impact of Brexit behind them, as the sky has not fallen in, but above all this is a sign of the Trump effect, with global and North American funds proving the two most popular equity sectors in today’s data.
Large swathes of the City and Wall Street have indeed had a 'Road to Damascus' moment with election of Trump: whereas on the campaign trail he represented uncertainty and danger, they are now salivating about the impact on growth and inflation from potential deep tax cuts, a shock and awe infrastructure investment programme, banking de-regulation and an expected fillip to corporate share buybacks as companies are incentivised to repatriate overseas earnings to the US.
Calling the top of a market is a mug’s game but over the long-term investors do have a habit of piling in when market are near their peak points.
Yet the art of successful investing is to buy low, sell high, not the other way round.
Sentiment has certainly swung aggressively from Fear to Hope and while there are a number of reasons to argue that the good time for equities might roll-on for a while yet, including rising inflation flushing cash into riskier assets, a possible pick-up in company share buybacks and a boost to UK dividends from overseas earnings being converted into weaker pounds, there are also clear risks in getting swept up by market euphoria.
Share valuations are pretty rich at the moment, especially US equities which are expensive on most measures.
Put politely, this is rarely a starting point for a new bull-phase. UK investors getting pumped up on Trump-mania should reflect carefully on the wisdom of using their much depleted Pounds to invest heavily in expensive dollar assets at the current exchange rate.
Closer to home, the consensus view is in favour of the shares of large, international FTSE 100 companies as a result of their overseas earnings and because of the recovery in oil and other commodity prices since the lows of the first half in 2016.
But with the UK economy faring considerably better than most economists have predicted – and even the Bank of England’s Andy Haldane admitting they have got their Brexit predictions utterly wrong – it might just prove to be the case that currently out of favour mid and small caps shares, which typically have greater domestic exposure, turn out to surprise this year and that the currency benefit from the weak pound in supporting larger companies dissipates to some a degree during the year if the Bank of England ends its current QE programme and sterling as a result climbs against the Euro.
UK equities therefore may prove to be a better place for investors to deploy their battered pounds than US equities at the moment and rather than chasing FTSE 100 stocks at these levels, a broader approach to the market might make sense through funds that have a wider remit to rove across the market such as JO Hambro UK Opportunities, Evenlode Income and Liontrust Special Situations.
But above all, an incremental approach to making new investments is a sensible one when markets have surged so strongly rather than piling in aggressively based on an outbreak of exuberance.
Jason Hollands is managing director at Tilney Bestinvest. The views expressed above are his own and should not be taken as investment advice.