A greater interest in one-stop shop strategies and an aversion to risk have been among the major themes for retail investors recently, according to the Investment Association.
In its annual survey into the UK asset management industry, the trade body found that there were three key trades that dominated investor demand.
The first was a focus on outcome and allocation strategies – a diverse category “with the unifying characteristics of active allocation and/or specific risk management objectives relating to volatility or absolute capital preservation”.
This includes multi-asset, absolute return, the newly-launched volatility managed, and the money market sectors.
The five mixed asset sectors saw retail inflows of £7.6bn last year, with £2.9bn of this flowing into passive vehicles. However, the IA Unclassified sector makes up a large share of the mixed asset universe and had the highest net retail inflow in 2017, £5.8bn.
Net retail sales of mixed asset funds from 2003-2017
Source: Investment Association
The survey noted: “There are a significant number of mixed-asset funds in the Unclassified sector and there are two reasons for this.
“These funds may change their asset allocation more often than those in the mixed asset sectors, making them less comparable to other mixed asset funds and the mixed asset sector parameters are largely based on the fund’s exposure to equities.”
As such, funds which change their asset allocation relatively frequently could end up switching between mixed asset sectors fairly often, meaning that not one sector would be appropriate.
Meanwhile, the IA Targeted Absolute Return sector was the third highest-selling sector for UK retail investors last year with funds under management rising 15 per cent to £81.3bn.
So, is this shift to multi-asset strategies ongoing or is it just a 2017 story? The report suggested that these outcome and allocation funds have been growing in popularity over the last 20 years.
“Notably, there has not been a single annual outflow since the IA started collecting data in 1995 with the last 10 years specifically seeing a step change,” it said.
Indeed, over the last 10 years outcome and allocation funds accounted for 40 per cent of total net retail sales since 2008 compared to 20 per cent in the decade before that, while 80 per cent of flows since the global financial crisis have landed in funds that have an income, allocation or wider risk-management objective.
“This universe expands the definition of active management well beyond stock and securities selection into areas where value is added by specific expertise – e.g. asset allocation or risk targeting,” the survey said.
“The rise of passive multi-asset is one illustration of this, with allocators needing to take a view on asset classes, geographies and possibly factors such as investment styles, which is ultimately an active allocation decision.”
Fund of funds also had a record breaking year in terms of sales in 2017, helping their market share increase to 12.5 per cent of industry assets.
Income investing remains a strong theme but perhaps somewhat surprisingly (with many concerned about an interest rate tightening cycle in the US and still near-record low yields elsewhere) fixed income was the second most-bought area for private investors.
The survey said: “Bonds are the natural home for investors looking for income provision and they clearly dominate this space.”
Sterling strategic bond funds drew the lion’s share of net retail sales with sterling corporate bond the next best-selling sector.
Net retail sales of fixed income funds from 2003-2017
Source: Investment Association
This is consistent with the trend among investors for bond funds with greater investment flexibility during a more uncertain investment environment.
Strategic bond funds tend to have wide investment mandates allowing access to bonds across the fixed income spectrum as well as more freedom to manage interest rate risk.
Mixed asset income funds also saw strong inflows, however last year was the first since 2000 when there was an outflow from equity income funds.
“Given that this group is skewed toward UK equity income funds – 79 per cent of assets are UK focused – this outflow could be linked to broader investor asset allocation decisions and the general outflows from UK equity that we have been observing throughout 2017,” the survey said.
Indeed, another main theme highlighted by the study is that investors have been turned off from the UK in general, although Equity growth saw positive net retail sales following an outflow in 2016.
Global and Europe funds – which saw £5.6bn and £2.9bn in inflows respectively – were the main drivers behind this, while the IA UK All Companies and UK Equity Income sectors saw outflows.
“UK equity funds have seen outflows of £7.5 billion over the last two years, suggestive of a more negative view of UK equities since the Brexit referendum,” the survey said.
“In the context of continued investment of UK investor money in overseas funds and vice versa, this would imply that any concerns on Brexit relate more to the chances of future growth in the UK equity market rather than the continued existence of the infrastructure that allows seamless cross-border distribution.”
Another main theme is the continued rise of passive investing, with net sales of passive funds more than tripling last year in comparison to 2016. Overall, the market now makes up 16 per cent of all retail investments, as the below chart shows.
Funds under management of passive funds by index investment type from 2008-2017
Source: Investment Association
Much like the active universe, mixed asset funds were the most popular while from an equity perspective global was the top choice.
However, unlike their active counterparts, passive UK equity funds received positive net retail sales, with an £800m inflow.
Across the whole universe, which includes institutional investors, this figure rises to 26 per cent and the report said there are two reasons for this.
“First and foremost, it may relate to greater use of either active or passive investment strategies within each asset class, for example, there could be increasing demand for passive products to achieve equity market exposure,” it said.
“Second, but equally important, it may reflect changes in the allocation between asset classes where more money is allocated to strategies that involve by nature more active management, such as multi-asset or outcome-focused.”
Another reason may be the increased influence of exchange traded funds (ETFs), which have seen funds under management increase from £11bn in 2008 to £250bn in 2017.