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Safety switch

Until last year, IMA statistics showed net inflows to all types of funds, funds under management growing year on year and net sales of equity funds, including property funds, outstripping any other asset class. Since the credit crisis began, we have all entered a different world where investors are more cautious. Let us see how investors have been behaving over the past year.

It seems investors are not adding to their holdings of equity funds but reducing them a bit. Short of a miracle, equity funds will have an overall net outflow for 2008 but still representing on current trends only about 2 per cent of total retail investment in equity funds.

The love affair with equity funds may have diminished somewhat but the flame has not died. When investors bought new funds or switched existing fund investments, most still plumped for an equity fund. These funds accounted for 65 per cent of gross sales in the first nine months of 2008, down from 74 per cent in 2007.

Investors continue to put more money into funds overall than they take out but they are making more cautious choices. In terms of net retail sales, their most popular asset choice is bond funds which have taken in 1.5bn so far in 2008. Investors have also spread risk through funds of funds which took in a net 822m in the first nine months of this year. These investments were mainly (533m) into balanced funds. Investors also put a net 853m into balanced funds that were not funds of funds.

This year saw the creation of the IMA’s absolute return sector, with funds aiming to deliver more than zero in any market conditions. This sector has been the best seller so far this year. Funds of this type have clear attractions in this financial climate.

IMA statistics confirm our Great British Investor report in May saying investors were being more cautious and preferring bond funds over equity and property funds. Investors intended to sit tight and ride out volatility. The next survey, out in January, will tell us how attitudes and plans have changed in the last six months.

It is hard to predict what will happen and how this will affect fund sales in the last quarter. A volatile market has made it harder to predict investor behaviour but a running theme is that investors are being very careful with investments, switching to less risky asset classes. This safety-first approach is understandable at a time of economic uncertainty although it will also limit the upside when markets improve. Historically, the best returns have gone to investors putting in money when the market is at the bottom although nobody knows when this will be or if it has already happened.

Mona Patel is head of communication at the Investment Management Association

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