Investors dump bond funds and increase exposure to UK equities
Investors were driven by fears over the health of corporate and high yield bonds in an economic downtur…
21st April 2020 16:09
by Tom Bailey from interactive investor
Investors were driven by fears over the health of corporate and high yield bonds in an economic downturn.
UK-domiciled funds saw their largest ever withdrawals on record in March, with net outflows totalling £8.7 billion, according to data provider Morningstar. March saw markets around the world plunge as the world started to fear the global spread and economic consequences of coronavirus.
However, a breakdown of the data shows that the record decline was not purely the result of panic-stricken investors selling into a tumbling market.
For example, the highest outflows were from fixed-income funds, with a total of £5.5 billion withdrawn in the month.
Many investors were likely driven by fears over the health of the corporate and high yield section of the market in a downturn. Corporate bond funds were the most sold fund type. However, also motivating investor sales was likely an attempt to raise cash, particularly given the price increases of government bonds in March. As Morningstar notes: “[There was] some opportunistic investors switching to equity to take advantage of low valuations resulted in redemptions from fixed-income funds across the board.”
On top of this, equity funds saw relatively small outflows. March also experienced a bigger movement of funds from active to passive than usual. While this has been a general trend, an increase in passive growth is suggestive of a ‘buy the dip’ attitude.
UK investors also increased their allocation to UK equities, with UK large cap funds seeing £2 billion in inflows, the largest of all categories. According to Morningstar: “Given a widespread belief that UK equities were undervalued going into the coronavirus sell-off, a drop of 30%-plus encouraged many investors to invest heavily in UK large-cap equity funds.
“While some of this may have been short-term opportunistic buying, it shows that many expect a recovery soon. UK equity funds that are lower down the market-cap scale saw net outflows, but they were relatively small compared with many other areas of the market."
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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