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Investors flee UK income funds, bank rebound profits

7 July 2020

The share price ratings of UK equity income trusts held up last month despite Investors withdrawing record amounts from open-ended funds.

UK investors pulled a record £679m from open-ended funds investing in UK shares in June, eclipsing withdrawals following the Brexit referendum, in the run-up to the December general election and during the onset of the coronavirus pandemic.

That was driven primarily by £671m of outflows from UK equity income funds, also a record, amid heavy dividend cuts across the UK stock market, according to figures from funds settlement service Calastone.

While funds investing in UK shares were hit by the biggest redemptions, equity funds focused on all geographies, except global strategies, suffered net withdrawals last month.

Wider profit-taking saw a net £1.2bn pulled from equity funds as stock markets continued to rebound from the crash to March lows sparked by the coronavirus pandemic. Global stock markets are now in positive territory in 2020 though the UK market, hit harder by the falls, is still down since the turn of the year, with the FTSE All-Share 15.8% lower.

UK investors had been buying back into funds at a ferocious pace since markets bottomed in March. They invested a net £3.7bn in April, a record amount since Calastone started tracking UK fund flows in 2015, and a further £3.1bn followed in May.

Actively managed equity funds bore the brunt of last month’s withdrawals, with just over £1.1bn pulled but, unusually, index-tracking passive equity funds also endured a negative month, with £62m of net withdrawals indicating a wider rotation out of risk assets.

Fixed income funds were a key recipient of that, with bond funds taking in £474m according to Calastone, which estimates the monthly flows by scaling up the transactions by UK investors which take place across its network. The fund settlement service said money market funds, with a risk profile close to cash, took in a similar amount, with net inflows totalling £927m across the two asset classes.

For only the second time on record, mixed asset funds suffered net withdrawals, shedding £228m in June. Such funds are popular in pensions and ISAs, topped up by direct debits, and so rarely see outflows.

‘There’s no doubt investors are banking the big gains they have made on the billions they have ploughed into the market since its lows in March,’ said Edward Glyn, Calastone head of global markets.

‘Almost all the trading signals across Calastone’s network pointed in the same direction in June – investors bailing out of riskier fund categories into safer ones, even affecting segments like index funds and mixed asset funds that almost never see outflows.

‘The record outflows from UK funds seems to be explained by a combination of three factors. First, the economic news from the UK was especially bad in June, second a no-deal Brexit is increasingly likely, and third, the impact of dividend cuts is greater in the UK than in most other parts of the world.’

Nearly half of FTSE 100 companies had cut, cancelled or deferred dividend payments by the end of June, leading dividend forecasts for the year to slump by a third from £91.1bn in January to £62.3bn, according to online broker AJ Bell.

Trust sector discounts

The outflows from open-ended funds were to some extent reflected in the ratings of investment trusts, or ‘closed-end’ funds, and whether their share price discounts to net asset value widened or narrowed.

Stifel analyst Anthony Stern writes: ‘Over the second quarter discounts for the overall investment funds sector narrowed by 2% and now trades on a 7% discount.

‘The Commodities sector saw its discount narrow by +11%, as economic sentiment improved as countries relaxed their lockdown measures.

‘The Hedge Fund sector also re-rated (+8%) as investors were attracted by the resilient first quarter performance of the Brevan Howard Global (BHGG ) and Macro (BHMG ) funds and Pershing Square (PSH ).

‘Sectors which have de-rated included Private Equity (ex 3i, -16%), Real Estate Debt (-18%) and Private Debt (-17%) as investors anticipated potential write-downs and provisions in the months ahead.

‘The leasing sector de-rated sharply by -45%, as the aircraft leasing funds have been particularly badly hit, as a number of their airline customers went into restructuring eg, Thai Airways and Norwegian.’

UK Equity Income trusts have generally fallen in line with the UK stock market with their share price discounts widening only slightly in the first and second quarter to their current average discount of around 4%.

For more information on UK Equity Income and trusts generating overseas income, read the summer edition of Investment Trust Insider’s e-zine. 

Investment company news brought to you by Citywire Financial Publishers Limited.

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