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Chasing returns: Are investors buying funds at the wrong time?

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30/06/2014
The reversal of fortunes for the IMA UK All Companies sector this year has again raised the question of whether investors’ buying patterns are leaving them exposed to market corrections.

Research conducted by trade publication Investment Week has examined the performance of the best- and worst-selling Investment Management Association (IMA) sectors in the months following their move to the top (or bottom) of the sales charts. The numbers reveal several notable anomalies suggesting investors could be buying the wrong sectors at the wrong time.

UK All Companies

The most glaring discrepancy centres on UK equity funds.

The UK All Companies sector has spent the last four years firmly out of favour with investors, having been the worst-seller for 2010, 2011, 2012 and 2013 among ISA buyers, according to IMA figures.

During that time, the average fund in the sector returned 59%. This is well in advance of the average fund in every other major regional equity sector, with the exception of North American equity funds which returned an average of 6%.

By the end of last year, the problem had reversed: UK All Companies had finally returned to favour, topping the net retail sales chart in Q4.

The renewed interest was, however, a precursor to returns moving in the opposite direction: the average fund in the sector looks set to end the first half of the year in negative territory, standing down 0.75% at the time of writing (26 June).

“It is human nature to buy funds that have done well most recently and, often, if the sector has done well, it has had an internal re-rating and does not have the value that it had previously,” said Darius McDermott, managing director at Chelsea Financial Services.

“Buying low is very uncomfortable,” said Alastair Mundy, contrarian manager of Investec Asset Management’s £2.8bn Cautious Managed and £1.3bn UK Special Situations funds.

“You feel very lonely. It is a bit like eating a meal in a restaurant on your own or single-handedly clapping a referee at a football match for what you view as a good decision, but which everyone else thinks is disastrous.”

Chasing momentum

How prevalent is this trend more generally? Data analysed by Investment Week shows that, in recent years at least, investors’ habit of chasing momentum has served them well on occasion.

Examining the most popular sectors of the past seven quarters, some of those chosen –  UK Equity Income in Q3 last year, the bond sectors in 2012 – have continued to perform well.

Other choices, however, have proved ill-fated: most notably the decision to flock to Global Emerging Markets funds in Q4 2012. The sector made a strong start to 2013, but that was swiftly followed by the ‘taper tantrum’, which sent valuations tumbling.

Viewing the issue through the prism of the least popular sectors does not make for particularly positive reading, either, given the issues with UK All Companies funds highlighted above.

More recent quarters show a similar story: three consecutive quarters of outflows for the Sterling Corporate Bond sector may have made sense given Federal Reserve tapering was imminent, but they were again followed by three consecutive six-month periods of healthy returns.

Buying at the bottom may be lonely, but selling at a widely-adjudged ‘top’ has its own problems: few would have recommended buying fixed income at the start of this year, but the Sterling Corporate Bond sector is on course to produce a 4.2% return for the first six months of 2014.

Most popular sectors

 Quarter Sector Quarterly Flows Return previous 6 months  Return next 6 months      
 2013 Q4  UK All Companies  £946m  14.00%  -0.70%
 2013 Q3  UK Equity Income  £865m  6.20% 7.30%
 2013 Q2 Mixed Investment 20%-60%  £831m  3.90%  4.40%
 2013 Q1 Mixed Investment 20%-60%  £606m  8%  0.50%
 2013 Q4  Global Emerging Markets  £642m  10.70%  -3.25%
 2013 Q3  Sterling Strategic Bond £454m  5.50%  5.00%
 2013 Q2  Sterling Corporate Bond £1.2bn 4.50%  8.20%
 2013 Q1  Sterling Corporate Bond  £776m  5.80% 7.00%

 Least popular sectors

 Quarter Sector Quarterly Flows Return previous 6 months  Return next 6 months      
 2013 Q4  Sterling Corporate Bond (-£383m)  2.30%  4.20%
 2013 Q3  Sterling Corporate Bond  (-£395m)  -1.10%  2.50%
 2013 Q2  Sterling Corporate Bond  (-£351m)  -1.40%  2.30%
 2013 Q1 UK All Companies  (-£721m)  15%  6.30%
 2013 Q4 UK All Companies  (-£339m)  10.70%  10.50%
 2013 Q3 UK All Companies  (-£654m)  1.75%  14.60%
 2013 Q2 Europe ex UK  (-£383m)  1.50%  17.30%
 2013 Q1 UK All Companies (-£620m)  15.60% 1.75%

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