AJ Bell: Investors gobble up gilt funds as equities see record outflows

by | Nov 3, 2022

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Laith Khalaf, financial analyst AJ Bell
  • UK Gilt funds were the best-selling sector with retail investors in September, according to data from the Investment Association
  • The mini-budget chaos likely prompted some investors to go bargain hunting
  • Since the mini-budget, AJ Bell customers have bought more individual gilts than in the rest of the year combined
  • Overall, fund buyers seem to be heading for the hills, with a record £4.6 billion withdrawn from equity funds in just one month
  • Market performance, an economic slowdown, and rising cash rates are all key factors

Laith Khalaf, head of investment analysis, AJ Bell:

“It’s extremely rare to see UK Gilt funds anywhere near the top of the best-seller charts, which just goes to show quite how much turmoil the mini-budget caused. This fusty area of the investment world was thrown into the spotlight by Kwasi Kwarteng’s fiscal plans, which knocked the wheels off the gilt market, and clearly prompted investors to swoop in to pick up bargains. Indeed, since the mini-budget, AJ Bell customers have placed more individual gilt purchases than in the rest of the year combined. While some stability has now returned to the gilt market, rising interest rates and persistent inflation still present a threat, and should expectations for these two key metrics rise from here, gilts could come under pressure again.

“Aside from a small chink of light in the gilt sector, the overall picture coming through loud and clear is that fund buyers are taking their money and heading for the hills. £7.6 billion of funds were sold down in September, taking the total for the year to £22 billion. Almost £5 billion of equity funds were sold in September, a record outflow according to the Investment Association. Even the flavour of the month ESG sector saw outflows.

“There are a number of factors at play here which are causing investors to dump funds. The S&P 500 has fallen into a bear market this year, taking global funds down with it, and giving investors pause for thought after a bull run that can be charted back to 2009. There’s also the spectre of inflation, and the ensuing economic damage that is still building across the globe.

“Economic woes and market confidence ebb and flow, and with them the money moving into and out of investment funds. But what the funds industry should be really worried about, is the return of cash savings to the fray. Stock market funds have had a captive audience ever since central banks knocked cash savings out of the running back in 2009, by cutting interest rates to inconceivably low levels. Monetary policy is now shifting rapidly in the opposite direction, and consumers can now get an increasingly reasonable return on their cash without taking any market risk. Cash will therefore continue to prove more of an allure for consumers as interest rates rise, especially if the stock market continues to splutter.

“If interest rates do rise to 5% next year, savers will naturally ask why they should be investing in funds, when they can get such a decent return on cash in the bank. The answer is that for long term savings, the stock market is still likely to deliver more, albeit with more thrills and spills along the way. And counter-intuitively, the best time to invest is normally when the sky appears to be caving in, and everyone is heading for their bunker. But the investment industry is going to have to work much harder to make and win this argument than it did in a zero-interest rate environment.”

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