Cherry Reynard takes an in-depth look at which sectors investors were favouring last month
The markets were ‘risk on’ in November, with economically sensitive areas such as continental Europe and Asia the top performers. While every sector was in positive territory for the month, conventional gilts and money market funds were at the bottom of the heap.
This was reflected in fund flows, which saw investors begin to take increasing risk with their portfolios.
Globally, EPFR reported that investors put more into US stock funds in the last week of November than they had in the past 12 months. Equity funds took $14.86bn, the second largest total since 2008 and dramatically reversing earlier outflows. It was a sign investors were becoming more sanguine about the US fiscal cliff, recognising that a resolution was likely and investing in anticipation of a bounce in markets.
Where did the smart money go in November?
Within equity funds, emerging markets were the key choice for investors reintroducing risk. Emerging market stock funds attracted $3bn. Many are working on the theory that if the US economy gets back on track, it will not be the already expensive US stock market that will bounce. Instead, more cyclical areas such as Asia will benefit.
Perhaps more surprising was that bond funds continued to attract new cash. There are mounting concerns that the bond markets have little upside and increasing downside.
This year has seen spreads contract for corporate bond funds and yields on developed market government bonds remain historically low. Although there appears to be no immediate danger of a significant back-up in yield – many gilt buyers are not valuation-sensitive – it begs the question whether bond investors are paying too much for ‘safety’.
Bonds funds attracted $5.17bn in new investor cash in the final week in November with around half of that going to US bond funds. High yield bonds were the most popular part of the market, reflecting the wider desire for riskier assets.
A similar picture was seen in Europe, but flows into bond funds were even stronger. Morningstar says the second straight month of net positive inflows into equity funds was dwarfed by the ‘stampede’ into bond funds. Bond funds posted inflows of €22bn in October, making it the best month for bond funds on record. In the meantime, a mere €1.8bn flowed into equities.
That said, where investors did move into equities, it tended to be at the higher risk end. Emerging market equities led the pack, gathering net €1.94bn in new money. Global large-cap blend and global large-cap value funds continued their run of popularity, generating inflows of €1.43bn and €1.02bn respectively. However, investors lost their urge to diversify with alternatives funds seeing the highest net outflows – €1.31bn. Guaranteed funds were weak, suggesting investors had sufficient confidence in markets to no longer pay to protect their portfolios.
UK investors have been far more willing to embrace equity funds. In general, they have stuck with income-generating funds, in particular UK equity income and global equity income, but top of the heap in the UK, as elsewhere, was global emerging markets. GEM funds took £228m in October, the highest level of sales since November 2010.
Unless there is income involved, UK investors remain largely uninterested in their domestic market. The UK All Companies sector was the worst-selling sector for the third consecutive month with a net outflow of £275m.
It has been the worst-selling sector for eight out of the previous 12 months. However, this preference has not rewarded investors this year – the UK All Companies sector is ahead of the UK Equity Income sector over three, six and 12 months.
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