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Sting in the retail

Since the turn of the year, business has been relatively buoyant for most major fund groups but sales have suddenly fallen off a cliff.

According to the latest IMA figures, net retail sales plummeted by 84 per cent from 801m in April to just 126m in May, leaving most seasoned observers scratching their heads in confusion.

The reason for the plunge is hard to fathom. On the whole, the last six months have been good for the industry, with retail sales between February and April never straying below 759m.

On the other hand, institutional sales have oscillated as wildly as ever – they stood at1.8bn in February but rose to 910m in May.

Obviously, such volatility – largely caused by life companies moving huge pension fund money around – has a major impact but this time the industry, usually so alive to such events, believes no such incident has occurred.

The IMA, which admits it is also in the dark about why sales have slumped so badly, is nevertheless placing some of the blame on hefty fund repurchases.

Chief executive Richard Saunders says: “Significantly increased redemptions in May pushed net retail investment to its lowest level since September 2002. The next few months will tell whether this marks a departure from the previous trend.”

The IMA does, however, acknowledge that a big problem has simply been weak sales, which has meant May’ redemptions – which are roughly similar to April’ – have had a far bigger impact than usual. But while the industry usually comes to some kind of broad consensus on the reasons that sales have fallen, this time no one can agree, with many fund groups even reporting strong business over the period.

Credit Suisse Asset Management managing director Ian Chimes says: “It just does not feel like such low sales. Everyone is saying things are looking fine. Perhaps because everyone thinks the market will be dull for the next few months, investors do not think they will miss out on something if they do not invest.”

Artemis also believes there has been no obvious event that could have sparked such a drastic fall, saying that its May gross sales were identical to those of April, with net figures also more or less the same.

Product development and communications director Nick Wells says: “The trend has been quite positive this year. There has been no catalyst that could have had such an impact. It is like the tap has just been tur-ned off. It is very strange and it does not bear out our sales.”

So have investors – until now seemingly confident in the market – simply lost interest? According to some IFAs, rising interest rates and falling house prices have started to curb people’ propensity to spend on non-essentials. Hargreaves Lansdown’ investor confidence coefficient, for inst-ance, plunged from 222 to 118 from March to June, a huge drop from the same period last year when it stood at 351.

Investment manager Ben Yearsley believes the reason is the climate – both financially and meteorologically – in which people are expected to invest. He says: “Last year, confidence was steadily building after the end of the Iraq war but this year, investors are more nervous with interest rates, the housing market and rising taxes. But I also think the weather has played a factor – business falls off when the sun is shining, as it has been for the past couple of months.”

Bestinvest points out that the recent publicity surrounding the stand-off between split-capital investment trust providers’ and the FSA has also done much to dent investor confidence.

Business development manager Justin Modray says: “The economic outlook is uncertain anyway but there has been so much publicity about misselling. There is also no one asset class performing particularly well at the moment, which is another factor, as is the European Championships in Portugal.”

The worst-hit area has been the UK corporate bond sector – in recent times, one of the strongest-selling sectors – with total gross retail sales falling from 377m in April to 293m in May. This was not entirely unexpected – fears that the sector had hit the top of its cycle have been mounting for many months.

It was a similar story with the UK equity income sector, in which total sales fell from 339m to 284m. However, as both sectors had long been suffering sliding sales, the dramatic drop-off must have been across the board rather than due to one or two of the major investment areas falling massively out of favour.

So what does this mean for the industry? Modray argues that all the aforementioned factors represent a big threat to groups but is as clueless as anyone as to why they would hit sales so hard in one month. Several groups have privately questioned the IMA’ figures but, as they are compiled with the firms’ own data, they are unlikely to be wrong.

What is arguably most likely is that, post-Isa season, investors have decided to adopt a wait and see approach, given the uncertainly surrounding the stockmarket, interest rates and house prices. Falling sales are unable to compensate for increased redemptions, with May marking the point at which all the above pressures came to a head.

The industry can only hope this was simply a blip and that investors – fickle at the best of times – start to put some of their disposable income in funds rather than in the bank.

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