The Investment Association reported yesterday that jerks kneed £3,500,000,000 out of funds in June – “clearly Brexit has been unsettling, with property and equity funds particularly affected” – the report opined.
Well £2.8bn was lost from equity funds and £1.4bn from property ( a much higher proportion of a smaller funds market). The rest came from multi-asset funds (ironically marketed as a safe haven in times of volatility).
Fools – Fools – Fools
Of course the knee-jerking had horrible consequences, no sooner had the money flown than the market recovered. I haven’t seen a detailed analysis of market timing but you can be pretty sure that a combination of poor execution and panic selling meant that most of the retail money left at intra-day lows and that spreads (especially the dilution levies on property funds) were at their highest.
Look how the peak trading volumes at the end of June aligned with the sharpest dip in the market (FTSE 100)
So the financial markets will probably have had a good time and the punters will be looking at exaggerated losses. It is ever thus when the herd takes flight.
Who drove the cattle?
Closer inspection of the IA’s numbers suggests that the exodus from funds was organised by advisers.
For the five fund platforms that provide data to The Investment Association (Cofunds, Fidelity, Hargreaves Lansdown, Old Mutual Wealth and Transact) we saw a net retail ouflow of £684 million in June.
While the non advised regular contributions into personal pensions (principally via AE) continued as usual, ISAs from the above platforms saw a net outflow of £464m and fund of funds £303m.
Meanwhile money continues to pour in. Fund platforms sold £7.8bn of funds in June with wealth managers and IFAs (managing wealth off platform) attracting £3.8bn of new money. By comparison – only £1.3bn arrived in funds directly from the customer.
It’s clear that the retail funds market is now owned and driven by financial advisers, whose monthly , weekly and sometimes daily newsletters are full of reasons to buy and sell on sentiment, rumour and sometimes on hard fact.
There is herding and a lot of it appears to be “jerking”. If I had given discretion to my wealth manager and found he or she had been dicking around with my portfolio around Brexit, I would like to know exactly what made the adviser think he could out-guess the market. If I have been in a diversified portfolio designed to withstand volatility, I’s want to know why my portfolio had been altered , at precisely the time I had needed its defensive properties to cut in.
The big winners out of Brexit so far, are those invested in equities who remained in equities, those who had strategies and didn’t change them.
I am particularly worried that there may have been outflows from managed personal pensions (SIPPs) and that regular drawdown payments may have occurred at the very worst times. I am worried too that the vibes given to ordinary people about equities and property being “too dangerous” will result in a flight to cash.
Paul Lewis will probably point to this Midsummer Madness as further evidence that there is insufficient reward from equities to pay back the risk of disinvestment at the wrong time and I think he’s right. Unless people are prepared to ride out events like the referendum vote and not knee-jerk out of long-term investment strategies, they should never have invested into shares or property funds in the first place.
The Midsummer Madness is simply a symptom of a deep rooted mental insufficiency that is common not just in retail but all investors. “Knee-jerkism” should be prevented by advisers but – as the IA’s numbers tell us- most of the outflows came from fund platforms advised on by IFAs or from the Discretionary Funds managed directly by IFAs.
Why does nobody call this?
Nobody in the funds industry wants to call the problem of short-termism because the funds industry has never had it so good. Despite outflows of £3.5bn – the IA still reported that overall funds under management increased by nearly a Billion pounds in the month.
The IFAs are responsible for this massive surge of investment, nearly 50% of all retail funds are on IFA platforms and a further 34% in DFMs managed by IFAs. The direct investor is a rare breed.
The Fund Managers daren’t call the behaviour of IFAs for fear of reprisals (e.g. loss of distribution), instead they blame individual investors (who were cited as the panic sellers of property funds).
Individual investors are no longer the problem, the problem is the herd instinct of advisers who appear to be to get away with some pretty poor calls with iThoumpunity.
I would like to see some proper investigation by the fund managers (perhaps orchestrated by the Investment Association) into just who’s behaviours were responsible for the £3.5bn sold out of funds at the end of June (see trading pattern at the bottom of this graph).
Though it may not be easy for fund managers to say this, I think they will need – as insurers had to over pensions- take some responsibility for the actions of their distributors.