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Investment note: Seeking yield ‘with tin hats on’

6 October 2020

AJ Bell’s newest recruit, Laith Khalaf, financial analyst comments on the latest Investment Association figures, with headline fund inflows of £1.8 billion and global equity funds the primary beneficiaries.

Retail investors might have put £1.8 billion into funds in August, but most of that has flooded into bonds, which is actually a bearish signal. Add into the mix that institutional investors sold down £2.2 billion of their fund holdings, and overall the picture looks nervy.

UK equity funds continue to be the bêtes noires of the investment universe with another large outflow, for the third month in a row. Overall flows into equity funds just about managed to creep into the black thanks to £705 million flowing into Global Equity funds.

I suspect this is down to the Smith and Train effect, rather than any particular asset allocation call on the part of UK retail investors. Both Terry Smith and Nick Train have behemoth funds in the sector and loyal followings thanks to clear investment philosophies and strong performance.

Consistently strong investment into tracker funds may also help to explain the robust flows into the global equity sector, as this is a popular area for passive investment. But then again, so is the UK, which begs the question how the UK equity sectors would be looking without the steady flow of passive retail money.

Within fixed income, global bond and strategic bond funds enjoyed healthy inflows, which suggests that while investors might be risk off with their allocation between bonds and equities, they aren’t willing to give up entirely on return. The global bond and strategic bond sectors are at the more flexible end of the fixed income spectrum, which gives them more scope to invest outside the safer, lower yielding bonds of developed markets.

Herein we have a microcosm of the last 10 years; low interest rates encouraging investors to go out seeking yield with their tin hats on.”

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