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The long road

With all the hype over the last 18 months about people not investing any longer and retail investment funds seeing more than their fair share of outflows, it is time to take a long-term view.

Yes, the last 18 months have seen some outflows but even last year, which was a particularly trying time in the equities market, there was only a small net retail outflow from equity funds overall.

Moreover, looking at the bigger picture, since the IMA started collecting sales data by asset class in 1992, net retail sales of equity funds have been negative in only two years out of 17.

In research published last week, entitled, Trends in UK Retail Sales of Equity Funds, we show that over the long term, investors’ love of equities is by no means over. However, investors are perhaps becoming more cautious and are diversifying their holdings into non-equity asset classes. Nevertheless, in terms of gross retail sales, the majority continues to go into equity funds.

In terms of investment holdings, the research shows that retail investors still hold around two-thirds of their fund investments in equity funds although this has declined somewhat with a higher proportion of net investments in funds going into other types of funds over recent years.

There is an interesting comparison to be made in relation to continental Europe. Around two-thirds of total industry funds under management in the UK are held in equity funds compared with one-third in the rest of Europe.

While both experienced net outflows from equity funds during 2008, this represented only 1 per cent of funds under management in equity funds in the UK compared with 6.6 per cent in the rest of Europe.

The research also looks at investor behaviour in past recessions since the 1970s, showing that in each recession, net fund sales stayed mainly positive.

There is no overall trend across recent recessions although there are some potentially broad similarities. Sales declined ahead of both the early 1980s and early 1990s recessions and in both, net sales reached their lowest (negative) point in the first quarter of the recession.

Net investment remained mostly positive throughout, however, and climbed strongly towards the end of these recessions as GDP returned to pre-recession levels.

Of course, all recessions are different and cannot be a guide to what will happen this time. In addition, this recession is quite different as interest rates have been reduced in response to the credit crisis, whereas in the 1980s and 1990s recessions, interest rates were raised to deal with inflationary pressures.

So only time will tell how investors’ choices will develop in the short term but over the longer term, equities remain dominant in investors’ fund portfolios.

Mona Patel is head of communications at the Investment Management Association


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