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Herd instinct

The 7th Annual Survey from the Investment Management Association, entitled, Asset Management in the UK 2008, thudded metaphorically into my inbox the other day, its 102 pages offering much food for thought. However, in keeping with these frugal times, I plan only to nibble at a couple of morsels.

Both relate to last year’s sales trends and both are garnished by quotes from senior though, for the purposes of the survey, anonymous figures from the world of asset management. These, certainly in the latter case, display a curious detachment from the people that fund groups sell to and through.

The headline news is that, for the first time since records began – 1960, since you ask – this country’s funds industry registered a net exodus of money. Retail and institutional outflows from UK-domiciled funds last year were £2.1bn in total compared with inflows of £3.8bn in 2007.

These outflows – which, in case anyone was thinking of panicking, were still less than 1 per cent of the industry’s assets under management – were driven purely by institutional investors. Retail investors were caught in two minds – gross retail sales stayed strong at £63bn but retail repurchases were £59.3bn, once again the highest on record.

Choosing to view the glass as half-full, some two-fifths of respondents felt that market conditions were creating opportunities for new investment, with the first of our nameless big cheeses saying: “There is a bifurcation in the retail market between those customers who want to rush for the hills and those who see this as a buying opportunity. It depends upon the individual attitude to risk.” Bifurcations aside, I just hope many of those making for the higher ground were not doing so having crystallised chunky losses, which on one level is really about as risky as it gets.

Still, as a result of this admittedly understandable inclination to shy away from the perceived badlands of the equity markets, the sterling corporate bond sector alone represents 9 per cent of retail funds under management. Meanwhile the fixed-income sectors as a group enjoyed total net inflows of £2bn in 2008 – three-and-a-half times as much as the year before.

Now, I am on record, both within these pages and in my day job, as being not too concerned about retail investors creating much of a bubble in the bond market as the basic maths means they would have to keep up this rate of buying for a good few years yet. However, I do worry when anything looking suspiciously like a herd mentality builds up a degree of momentum.

Herds of investors tend to exercise their brains as infrequently as other crowds and, by and large, asset managers, particularly their marketeers, seem OK with this. And would you believe that private investors were solely responsible for driving net inflows into corporate bonds, directing £3bn towards the asset class in 2008 compared with a mere £125m, in itself a record low, the year before. For their part and obviously having read things differently, institutions were, over the same period and to the tune of almost £1bn, net sellers of corporate bonds.

“From a retail client behaviour perspective, this does appear to be a rational response in some respects,” our second senior but anonymous talking head told the survey, choosing their words very carefully indeed.

“You can track the upturn in flows into our fixed-income funds from the point at which the market looked as if it was at the bottom. However, we hope that the advisers are explaining the risks when you are buying a long duration fund. It may yield 7 per cent but it is not a risk-free asset.”

No kidding. Now that quote does raise concerns – not least, “appear” and “in some respects”. Furthermore, while I am delighted a fund manager should acknowledge that fixed income is not without risks more openly than is usual outside the smallprint, the implication that it is solely down to advisers to convey those risks is a bit rich.

Maybe the cloak of anonymity was intoxicating – “in clandestino veritas”, as it were – but it would appear that, at least in the eyes of some asset managers, when it comes to the sharp end of investment communication, advisers are on their own.

Julian Marr is editorial director of


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