Investors took a record amount of cash from funds as global stock markets crashed in the wake of the coronavirus crisis gripping the world economy.
Just over £3 billion was withdrawn from UK funds in March – three times the previous record set in June 2016, when Britain voted in the referendum to leave the European Union.
Experts expected equity funds to fare the worst, but the biggest financial hit was taken by fixed income funds, says market monitor Calastone’s Fund Flow Index.
Data tracked by the index showed £3.7 billion was taken out of the sector, 13 times more than the previous worst month for fixed income in January 2019.
Money flowing out of the funds wiped out gains made in the previous eight months as investors worried about yield spreads and unsustainable debt.
Investors left with few options
Equity funds saw £244 million flow out, with passive funds taking less of a hit with £1.4 billion going in.
Active funds had their second worse performance on record, losing £1.7 billion, while European Equity Funds also had a similar poor performance, seeing £1.7 billion withdrawn.
UK Equity Funds had their second-best month, attracting £508 million.
Edward Glyn, head of global market said: “Market crises are superficially all the same as volatility soars and asset prices collapse, but they differ enormously in the detail. The temporary loss of fixed income as a safe-haven asset class to counterbalance some of the huge losses in equity markets left investors with little option but to ride it out or park their money in cash or cash-equivalents like money market funds.
“Equally the courage of investors not to dump their equity holdings is surprising. The COVID-19 crisis has undoubtedly had a bigger impact than the EU Referendum shock, yet so far equity funds are weathering the storm. However long this crisis lasts and whatever other twists and turns it has in store, it has one thing in common with all the others. It will pass.”
Equities perform better than fixed income
Reflecting on how UK equity funds performed, Glyn explained home-market bias and low stock valuations played a part in investor strategies.
“The massive divergence between passive and active funds can be partially explained by long-term trends driving the growth of index investing and by the hard anchor of monthly direct debits, but these factors aren’t enough on their own to account for the huge disparity in March. It seems investors attempting to catch market troughs may simply be focusing on timing and just relying on the index to do the rest,” he said.
“Active managers do rather well in difficult times for stock markets so the big outflows from that segment at a time of such big inflows to passive funds are a little surprising. The preference for UK-equity funds is easier to explain, reflecting a home-market bias and the exceptionally low valuation of the UK market compared to its international peers.”