Coronavirus Turmoil Triggers Historic Outflows in British Fund Management Industry

While the world continues to reel under the effect of the coronavirus pandemic, the picturesque of the global financial market had been drastically wiped out. Several companies in the United Kingdom have reported a significant fall in revenues this reporting season, leading to a direct impact on their stock prices on the London Stock Exchange.

The fears of looming recession has been further adding to the negative market sentiments where investors are aggressively pulling out their cash from equities and other forms of investments. Over and above when the Federal Reserve of the United States reduced its interest rates to a historic low, the prices of gold actually witnessed a massive fall, a phenomenon never imagined or experienced before. It reflects how the current global situation has spooked investors and how it has been impacting the markets.

In the United Kingdom, the Fund Management industry has also severely impacted as hundreds of billions of pound worth of wealth has been eroded out of the capital markets in the country and just few are willing to venture out given the uncertainty regarding the future. The situation has been the same across all markets and asset classes, be it equities, debt, or bullion since prices of these asset have been tested rock bottom during these times. Towards the end of February, the movement in these markets were much more volatile but when April and May approached, stability has returned to most of these markets. It mainly underscores the government decision to open up the economy slowly from this week, allowing for the business activity to pick up in the country. However, it has been clearly stated that if easing of the lockdown leads to spike in the number of infections, the government would be forced to curtail back these concessions.

Till the mid of March, the investment funds in the country had reportedly seen their highest funds withdrawals since 2015. These withdrawals were mainly due to the plummeting of the markets during the month. Almost all major fund houses in the country got hit by billions of outflow due to the pandemic-induced rush to cash among investors. The data published by fund transaction network operator Calastone, which keeps the pulse of the funds in the country, showed that in the month of March the Bond Funds in the country witnessed a cumulative outflows of £7.3 billion. The data by Calastone further showed that the maximum redemption pressure on these funds was in the third week of March, after which stability seems to have returned to the markets. The pressure on these debt funds was more because investors feared that these elongated periods of lockdown would force many large as well as small companies to default on their interest and redemption payments; they also fear the risk of sovereign debt instruments not honoring their commitments due to the deteriorating state of the economies of their issuing countries. In the equity funds, the actively managed funds saw the maximum outflow compared to the index tracking funds, which actually witnesses inflow during the period. Despite the above fact, the pressure on the funds prior to the beginning of the lockdown conditions in the country was considerable. The market data as well as the assessment of the market sentiments made by the above fund operator, however, also reflects that the massive selling could be a result of quarter-end portfolio rebalancing.

The massive stimulus packages declared by the government all through the month of March and April had resulted in some euphoria into the market which helped to control the fall as there are now renewed hopes that many of the businesses in the country could actually survive this onslaught riding on the back of these packages. This period also was a favorite playground for value investors who would come out to bottom fish high value investments at rock bottom prices. The data provided by Calastone shows that passive strategy funds and indexed funds are the ones which witnessed positive inflow of funds. These funds in these times attract high-yield hunting investors who would avail of this opportunity to build themselves a long term high earning portfolios with the least possible risk. Between actively managed funds and passively managed funds, actively managed funds likely to have high volatility and offer high returns while passive funds broadly offer low risk and low returns. A rock bottom market like this usually provide a rare opportunity when an investor can get the best of both worlds where he could buy a passive fund with low risk and a high yield income which in the long term could match the returns of an active fund. From the behavior of the investors, it seems that they are moving towards safer investment options, tuning down their risk appetite in the portfolio.

It has been earlier experienced in other such events of pandemic or global crisis that the market bounce back significantly in the next couple of years, setting new peaks. It seems to be the same experience that has been guiding the market forces in the month of April and May to gain momentum. The reason could also be that in the month of February and March there was a lot of chaos in the market which was making it sentiment driven, but as the month of April came it started to become clear which industries are able to withstand and which market segment would eventually collapse. The sentiments in the markets had also calmed down with a better understanding on where things stood, which led people to take an informed decision. Several companies who have published their results during this time stated that their current financial results broadly reflects the impact of unprecedented economic crisis and are, otherwise, backed by sound capital management and robust balance sheet. However, many of them have cut down on their dividend payments and executive compensations to hold on the cash flows in order to sail through these turbulent times.

In the fund management business, passive funds have been the important ray of hope amidst this market chaos. The significant support seems to be coming from long term value investors who are holding the sentiments to help the market remain steady. It would be pivotal to track how several factors play out in the next few months, including the progress of the gradual relaxation of the lockdown in the country and the governments follow up on its stimulus packages that could potentially determine the future course of the capital markets and the British fund management industry.