By Alec Hogg
Independent investment research house Morningstar yesterday released its fifth annual survey of investment flows, the most comprehensive document of its kind. It tracks 95,000 fund portfolios housing $30.6 trillion worth of investor savings in 85 countries.
The 2016 results deliver some important signals. Critically, that equities are poised for a very good year; fixed interest not so good; and commodities look dangerously overheated.
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Next to death and taxes, another of life’s certainties is the public’s terrible timing of their investment decisions. It is a law of behavioural economics that aggregate people consistently throw their money at expensive assets and ignore cheap ones. And the higher the prices rise, the more the public demands a slice of the overpriced action – witness the frenzied buying ahead of the great equity market crashes of 1929, 1969 and 1987.
Morningstar’s research reveals that in 2016, a staggering three quarters of the world’s net new savings of $728bn went into funds focusing on fixed income ($412bn) and the money market ($155bn). Just as interest rates are about to start rising again, hitting capital values.
The largest proportionate increase was in commodities, where a net inflow of $29bn to an invested total of $155bn, represents a 26% popularity surge. Using the past as a guide, the Morningstar numbers ring a very loud warning bell especially for gold, which drew the lion’s share of the fresh investment into commodity funds.
At the other end of the scale, after three years of topping the table there was a net withdrawal worldwide of $33bn from equity-based portfolios in 2016. I liked the reminder deep inside the Morningstar report that “The average investor is a poor market timer. After the 2008 financial crisis when equity valuations were very cheap, the largest flows went into fixed income.” Is history about to repeat itself?
The report also confirms why those canny Scots at Aberdeen Asset Management, an active fund manager, jumped at the deal offered by Standard Life. The small net outflow from equity funds overall disguises a rout suffered by the actively-managed sector.
In this respect investors, especially in the US, could be acting rationally. Drawn by lower costs (that a host of surveys reveal have a massive influence on long-term performance) a net $390bn in fresh money went into the lower-cost passive portfolios last year – with a hefty $423bn leaving actively managed funds.
This is best reflected in the continued mushrooming of Vanguard, the creator of index funds, which is now the biggest fund manager on earth. Its 2016 net inflow of $317bn pushed Vanguard’s managed assets to almost $3.8 trillion. Another “passive shop”, Blackrock, is closest with $2 trillion. Biggest loser was active house Franklin Templeton, which suffered a $72bn outflow in 2016 after a $55bn reverse of the previous year. Investors have become cost-consciousness. Just like the rest of humanity.
