Investors are opting for more cash-like assets as they look to add diversification to their portfolios, latest fund flow data shows.
According to the Investment Association (IA), investors are showing resilience despite a more volatile geopolitical backdrop, but are more defensive in their choices.
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Which sectors are investors finding comfort in?
While investors are still putting money into the market, underlying allocations have shifted to a more defensive stance.
The IA Short Term Money Market sector was by far the strongest over the month, taking in a record £2 billion, suggesting renewed demand for capital protection and flexibility during the current uncertain environment.
A short-term money market fund is a relatively low-risk fund that invests in short-dated debt – government bonds or commercial paper, typically with maturities of 12-months or less. The idea is that they preserve capital while providing slightly higher returns than bank savings, with many of the liquidity characteristics of cash – in that you can park your cash securely without locking it away for a long time.
Miranda Seath, director, market insight and fund sectors at the IA, said: “Looking ahead, investors will continue to monitor geopolitical developments and their impact on the macroeconomic environment. While short-term volatility has led to more cautious positioning, this month’s data suggests that many investors are holding strong and remain committed to their long-term plans, reinforcing the importance of diversification and a disciplined approach to investing.”
Following the cautious theme, diversified strategies also saw high demand.
Mixed asset funds took in just over £1 billion. Targeted Absolute Return funds saw net retail inflows of £514.4 million while Mixed Investment 40-85% Shares gathered £154 million, suggesting continued demand for balanced strategies – investors want to remain in the market but are favouring a more diversified blend of assets while things look so uncertain.
Volatility Managed strategies posted £138 million inflows over the month.
Both equities and bonds saw broad sector outflows, of £1.3 billion and £97 million, respectively.
Equity funds suffered much stronger outflows in March, losing £1.3 billion, compared with £445 million in February.
At regional level, only Europe and Global sectors saw positive inflows, of £29 million and £135 million respectively.
North America saw its fortunes reverse – £417 million of positive inflows in February made way for £240 million of outflows in March.
Similarly, the UK also saw net withdrawals of £580 million, despite strong performance. Recent research by the trade body and Opinium said confidence in UK companies fell by 10 percentage points between the start of the Iran war (28 February) and April.
Investors are looking beyond US and UK
Also seeing withdrawals, though to a lesser extent, were funds invested in Asia and Japan, losing net outflows of £161 million and £86 million each.
As confidence in US and UK markets looks precarious, investors appear to be looking for diversification into other markets, with Global Emerging Market equities receiving a fourth consecutive month of positive demand in March, taking in £317 million as these economies benefit from a weakening US dollar.
The US dollar typically has a strong inverse correlation to emerging markets (EM). Many EMs borrow money in US dollars, so if the dollar is strong, they need more of their own (weaker) currency to service that debt – it costs them more.
There’s also the commodities angle. Many emerging markets are large commodity producers – think oil, gas, iron and coffee, which tend to be priced in dollars. If the dollar is strong, these products become more expensive to buy, which lowers global demand and hits EM exports.
Active funds struggled further in March
Perhaps also underlying investors’ reticence to make any strong bets in a particular direction, has been the dominance of trackers over active funds over the month.
The IA report showed net retail inflows into tracker funds of £915 million in March, bringing their total assets under management to £402 billion, representing 24.9% of total industry funds. This was marginally higher than February’s inflows of £890 million.
Conversely, active funds took in £448 million, dropping off considerably from the previous month, when they gathered £1.6 billion. Active equity outflows increased from £1.3 billion in February to £2.1 billion in March.
Which bond funds have investors favoured?
After four consecutive months of positive inflows, bond funds have now also taken a hit, with £966 million net redemptions. Only the IA Mixed Bond and Global Inflation Linked categories took inflows within fixed income. UK Gilts reported £108 million outflows while broader Government Bonds saw £124 million exit.
ISA season also provided a supportive backdrop, with £1.4 billion invested in March.
Seath added that it had been the most robust start to an ISA season since 2021.
She said: “This underlines the importance of tax-efficient investing as a consistent driver of flows, even during periods of heightened uncertainty.”