Investors ran for cover in March, as financial markets swooned in the face of the oncoming pandemic, and in some areas we saw significant selling of investment funds. As markets bounced back in April and May, we saw a full reversal of those investor outflows. The ebb and flow of economic and public health data have influenced markets since then. And while we know that individuals have increased their overall savings and deposits, they have generally continued to add to their fund holdings through the subsequent months – though what they have been buying has changed.
While investors did buy back into equity funds in the immediate aftermath of the sell off, the experience since than has been somewhat patchy according to data from the Investment Association. Equities have been the clear “risk-on” asset, and when there have been concerns over vaccines or when renewed lock downs have threatened economic growth forecasts, we have seen investors reduce their equity exposure. We saw this in September for instance when many investors, certainly in the UK, sold out of equity funds.
What has also been interesting, in equity fund flows and performance, has been the type of stock that has been working for investors and fund managers?
For most of this year, the darlings of the stock market have been the high growth names like Amazon, Google, Netflix etc. As well as partly benefitting from lockdown conditions, they are also less dependent on near term GDP forecasts– theirs is a long term investment case. So investment funds that were in this “growth” category did well and their counterparts that would be labelled as “value” stocks continued their long term relative decline. So far this year US growth names have 36% better than value. And over 10 years, the annual return from investing in US Growth stocks was 18% compared to 10% for value names. However in November on the back of the Biden victory and the news on a possible vaccine, value investors (and funds) had their day in the sun beating their growth counterparts. Though at time of writing the gap is modest value stocks are up 11%, compared to an 8% return for US growth investors so far this month.
Is there going to be a change in market leadership and winning investment styles? Too soon to say, global economies are still fragile and vaccine- dependent . Worthwhile keeping an eye on bond yields as low yields play a key part in supporting the valuation of these long term growth stories.
Other asset categories have been attracting investor attention recently.
Bond funds have seen significantly more inflows than equities, based on fund data in the UK and data from the Central bank of Ireland. And while traditionally this might have meant boring domestic government bonds, because today they offer such low yields, the key words for bond investors have been global, corporate and strategic.
We have seen more investment in corporate bonds as investors seek to eke out some extra income. This usually means not only investment grade bonds but also high yield bonds – some of which in the past would have been labelled “junk”.
As well as moving up the risk spectrum on corporate bonds, there has been steady interest in “strategic” bond funds. This is where the fund manager has a wide and active brief that will allow them to deliver a return in excess of cash through potentially investing in a range of bond types and markets – including Emerging Market bonds and currencies.
To date corporate and strategic bond funds have certainly had a strong tailwind at their back – Central banks have become buyers of corporate bonds. But they are not riskless assets and we have yet to see a major credit event that might have knock on impacts on poorer quality assets.
As well as the bond story, another big feature in what investors are buying in 2020 is in the area of ESG investment. These are funds that look beyond the balance sheet and the P&L account to invest in companies who score well on issues such as good governance, good social practices and environmental policies.
This is a global phenomenon. In the US according to Morningstar, last year in we saw $21 billion flow into the sector. This year it is over $31 billion already. In the UK 2020 flows are four times what they were in 2019.
Investors have bought into ESG funds through 2020 regardless of underlying market conditions. In March in the face of industry-wide outflows, ESG funds still saw money coming in! According to Investment Association data this sector saw positive flows each and every month.
So as well as selling very well, these funds appear “stickier” as the underlying investor is motivated by more than just market beta. There is a very wide range of ESG funds now available in Ireland and given proposed regulatory changes, notably on the pension front, we will see continued meaningful investor demand.
I suspect that demand will be met by fund supply!
Tradewinds 