Interactive Investor

Fund sales are booming, but what are investors buying?

Kyle Caldwell runs though the types of funds investors have been snapping up as sales hit their highest level in almost three years.

6th June 2024 12:07

by Kyle Caldwell from interactive investor

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The start of the new tax year, which began on 6 April, often provides a boost for fund sales as investors look to take advantage of a fresh ISA allowance.

Those who invest early tend to reap greater rewards over the long term due to having an almost extra year of investment. As a result, there’s more time to benefit from the wonders of compound interest, which is where your investment returns themselves generate gains.

However, while the start of the tax year is usually a good month for fund sales, new investor money in April has been notably strong.

Figures from the Investment Association (IA) show that net retail sales reached £2.8 billion, which is the highest level of inflows since August 2021. The inflows are more than 50% higher than a year ago, with £1.2 billion of inflows in April 2023.   

As well as utilising the new annual ISA allowance of £20,000, the near three-year high in fund flows also “signals the green shoots of investors’ increasing confidence”, according to Miranda Seath, director, market insight and fund sectors at the IA.  

Seath adds: “The sharp rise in inflows can partly be attributed to the new tax year, with strong ISA sales during April as investors sought to maximise their personal allowances.”

While investors have been splashing more of their cash, the same trends from the past couple of years continue.

Tracker funds, which aim to mirror the performance of an index, have increased in popularity. Inflows into tracker funds reached a new record of £3.8 billion in April, exceeding the previous high of £3 billion in November 2020.

IA data shows that while investors favoured equity trackers (£2.6 billion in April), all asset classes saw inflows to tracker funds throughout April, including fixed income and mixed assets at £842 million and £287 million respectively.

Another trend showing no sign of running out of steam is investor preference for global funds. The sector remained by far the best-selling sector in April, with net retail sales of £1.3 billion, the highest since £1.8 billion in April 2021.

Also unchanged was fund investor sentiment towards UK equity funds. The worst-selling IA sector in April was UK All Companies, which registered outflows of £997 million. UK Equity Income was the second-worst seller, with £283 million withdrawn, while UK Smaller Companies sector had a smaller outflow, of £64 million.

Bonds topped the asset class charts, attracting £1.1 billion in inflows, ahead of equity funds pocketing £941 million. The past three years has been painful for bond markets, with rising interest rates causing bond prices to fall. However, the silver lining is that bond yields (the return generated over the life of a bond) have risen. 

Bond funds now yield between 5% to 7%, with those with higher yields generally taking on greater levels of risk. Bond funds are yielding above inflation, which means investors are being paid to wait ahead of interest rates being cut. While the jury is out on when rate cuts will commence, when they do happen, bond prices will rise, which in theory is a big tailwind for bond funds.

There were three other noteworthy findings from the IA statistics. First, April was the first month for positive inflows into mixed-asset funds since March 2022, totalling £376 million.

Second, investors cooled their interest in North American equity funds, with inflows declining from £662 million in March to £278 million in April.

Finally, responsible investment outflows remained neutral at £12 million in April.

Meanwhile, among interactive investor customers the popularity of passive funds and preference for global strategies shows no signs of abating.

Seven of the 10 most-popular investment funds in May were index funds and all invest globally: Vanguard LifeStrategy 80% EquityL&G Global Technology Index, HSBC FTSE All-World Index, Fidelity Index World, Vanguard LifeStrategy 100% Equity, Vanguard FTSE Global All Cap Index and Vanguard LifeStrategy 60% Equity.

Of the three active funds in the top 10, Fundsmith Equity invests globally, whereas Royal London Short Term Money Market and Jupiter India, do not.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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