2021 was a record year for retail investors putting money into stock market funds, according to IA data, with £14.8 billion going into equity funds, beating the previous record of £12.8 billion set in 2013. Laith Khalaf, head of investment analysis at AJ Bell looks at where the money went and why.
In the depths of the pandemic, people built up stacks of cash from not going out, and with interest rates on the floor, it’s little wonder that a lot of that money found its way into the stock market.
It wasn’t the UK index that enjoyed the limelight though, but rather funds investing in global stocks which saw the biggest inflows. Indeed, investors continued to withdraw record amounts of money from UK equity funds, eclipsing even the outflows witnessed in the aftermath of the Brexit vote, and all that despite a rally in the cyclical value stocks which constitute so much of the FTSE 100.
High levels of stock market investment were of course prompted by the economic optimism that followed the emergence and successful role out of coronavirus vaccines.
The average global fund returned 18% in 2021, so many retail investors are quids in on their decision to back this sector.
But the new year has brought with it traces of blood in the mighty US stock market. The S&P 500 fell by 5% in the first month of 2022. And based on afterhours trading, the Facebook owner Meta Platforms, a company worth almost a trillion dollars, lost 20% of its value overnight. That’s roughly equivalent to a company the size of AstraZeneca, one of the biggest in the UK stock market, disappearing in the blink of an eye.
This should be of concern to investors in global funds, which have on average over half of their assets invested in the US. For global tracker funds, that figure will be nearer to two thirds. Positive trading updates from Apple and Alphabet have applied some balm to nervy trading, but the slump in the Meta share price in after hours trading demonstrates that the US tech sector is so perfectly priced for success, that any sign of failure will be severely punished.
ESG trend
Elsewhere in the funds industry, responsible fund sales also hit a record high of £16 billion, however this is a very broad church which encompasses a range of approaches to ESG investing.
At one end of the spectrum we find funds which consider ESG factors, but may not make specific exclusions from their portfolio, while the other end is home to funds where every investment is chosen for its positive impact on sustainability issues. It’s therefore unclear how much of the exceptional rise in ESG fund sales is down to demand, and how much can be attributed to a reclassification of funds that previously wouldn’t have been considered ethical options.
This underlines the importance of the FCA’s current work on a green funds labelling regime, which should hopefully bring some much needed clarity to an area which is currently characterised by a myriad of shades of grey.
Challenges in 2022
Looking forward this year retail investors face a number of challenges in finding a home for their money.
The first is having some money to save for the future in the first place, with the cost of living set to soar in April, thanks to the increase in the energy price cap and tax rises.
The second is how to beat inflation when interest rates are still near record lows. Even with the Bank of England raising rates, price rises will leave cash returns for dust.
The stock market offers investors the opportunity to beat inflation over the long term, though of course, short term losses are possible.
With the S&P 500 looking precariously valued, investors might consider tempering their exposure to global funds with high US exposure, and even think about buying the deeply unloved UK stock market.
Wherever investors choose to put their money, there are two concrete steps they can take to address choppy markets and tax rises.
The first is drip feeding money into the market regularly gradually, which makes for a smoother journey, and takes the angst out of investing.
The second is to make sure their savings and investments are held in tax shelters wherever possible, to protect their money from the coming tax storm.
