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Categorized | Equities

$200bn drained from equity funds since start of 2016

Posted on November 13, 2016

Investors have pulled more than $200bn from equity funds since the start of 2016, with asset managers blaming the retreat on mounting concerns about political upheaval in developed economies and rocketing company valuations.

This year’s outflows are the worst for equity managers since 2011, when investors pulled $148bn from funds exposed to global stock markets.

Almost all types of equity mutual funds have been hit with redemptions this year, with $100bn being withdrawn in the latest quarter alone, according to figures exclusively compiled for FTfm by Morningstar, the data provider.

The sell-off comes at a time of seismic political change. The unexpected victory of Donald Trump in the US election last week and the UK’s vote to leave the EU in June took markets by surprise.

Jim McDonald, chief investment strategist at Northern Trust Asset Management, which oversees $946bn, said the outflows came on the back of investor “concerns over global growth and the deteriorating political environment”.

Helena Morrissey, former chief executive of Newton, the London-based investment manager, said that with some markets reaching record highs this year, including all three of the big US indices, investors are worried that stocks are overvalued.

The S&P 500 reached a record high in August and continued to climb after Mr Trump’s victory was announced. The FTSE All-Share index of UK stocks is up 16 per cent since the start of the year.

“There is a sense of [equity valuations] having defied gravity for a long time and the fundamentals don’t look so great. It doesn’t surprise me that people have taken money off the table,” she said.

The biggest outflows during the latest quarter were from US and European equity funds focused on large and midsized companies.

Investors are increasingly concerned about the political landscape in Europe, where a referendum in Italy in December and elections in France and Germany next year could yield unexpected results that dent confidence in stock markets.

There are also fears about the impact of Mr Trump’s proposed economic agenda on the US stock market, in particular the president-elect’s calls for tariffs on imports.

James Swanson, chief investment strategist at MFS Investment Management, the US fund company that oversees $439bn of assets, said: “The addition of tariffs is probably a negative for S&P 500 companies, since roughly 40 per cent of their revenues are generated outside the US.

“Lower revenues and profits should be expected if deglobalisation becomes a centrepiece of the Trump agenda, and we think it will.”

According to an index compiled by Hargreaves Lansdown, the British wealth manager, investor confidence in the UK stock market hit a record low this month, despite the FTSE 100 index reaching a 12-month high in October.

Laith Khalaf, senior analyst at Hargreaves, said: “The conundrum is that the stock market and confidence seem to be moving in opposite directions.

“There is some sense in this because as stock prices rise, investors become more wary of a subsequent fall.”

Darius McDermott, managing director of Chelsea Financial Services, a UK-based investment adviser, added: “We have been saying for the past year that the outlook for equities was uncertain, and that was before Brexit and [the election of Donald] Trump. People are struggling with [where to invest].”

Investor redemptions in the first nine months of the year represent about 6 per cent of total assets in equity funds, the Morningstar data showed. Despite the outflows, equity fund assets have risen 4 per cent this year, to $11.7tn, due to market appreciation and currency gains.

Investors globally have pulled another $11.4bn from equity funds between the start of October and the day of the US election, according to separate figures from EPFR, a data provider.

In contrast, bond funds and money market funds have attracted $276bn and $150bn respectively since the start of the year, according to Morningstar.

Vanessa Robert, an analyst at Moody’s, the rating agency, said there has been a “flight to safety” this year.

“Investors are looking to park their cash in what they consider to be safe investment options,” she said.

According to Moody’s, the assets in prime-rated money market funds that use either the euro or sterling as their base currency hit a 12-month high in September. This is despite many money market funds currently offering low or negative yields.

Mr McDermott said it has been a “very difficult year” for equity-focused asset managers. Several fund houses, including Henderson and Old Mutual Asset Management, have reported redemptions in 2016.

“If you are not doing really badly, you are probably happy,” he said.