Surge in tracker fund sales suggests return of investor confidence

A resurgence in sales of tracker funds in the first quarter of 2008 could indicate a return in investor confidence.

The latest figures from the Investment Management Association reveal that sales of tracker funds hit £64.3 million in the first quarter of 2008, following six previous quarters of outflows.

Although there were modest outflows in tracker sales in February, sales of £63.6 million in March made the quarter the first to achieve positive retail sales since quarter two of 2006.

The turnaround in sales of tracker funds – traditionally seen as the fund of choice for inexperienced investors – could signal that the markets are picking up, according to Rebecca O'Keeffe, head of investment products at Interactive Investor.

“Inexperienced investors are more likely to withdraw money at the first sign of trouble, so falls in tracker sales in February highlight the nervous market we have seen,” says O’Keeffe.

“But the inflows in March could be a sign that the market's picking up. Tracker funds bet on where the market is going, so these sales indicate people are either slightly less nervous or are looking at good buying opportunities.”

Dismal ISA season

Other than tracker funds, the IMA statistics show a slump in sales in the first quarter and also a dismal 2008 ISA season with net sales of just £276.4 million in March, down from the £533.8 million seen the previous year.

ISA sales throughout the whole of the 2007/08 tax year were low at just £1.3 billion, down from sales of £2.5 billion in 2006/07.

Richard Saunders, chief executive of the IMA, says: “The ISA season this year was modest, though over £250 million inflows in the last five days of the tax year pushed it up to respectable levels.”

Elsewhere, sales of funds of funds were down in the first quarter of 2008, from £834 million in the previous quarter to £637.3 million. The most popular funds of funds sector was cautious managed, with net inflows of £238.3 million.

O’Keeffe admits that the popularity of cautious managed funds suggests investors are still nervous, but suggests that these strong inflows could be from January and February, with confidence returning in March when tracker sales surged.

Ethical funds also took a hit in the first three months of 2008, with net sales of £27.6 million down from £99.7 million in the previous quarter. Inflows were also down at £5.4 billion from the previous quarter’s £5.9 billion.

O’Keefe says that the poor performance of ethical funds has deterred investors from going down the ethical route especially as sectors such as oil, gas and tobacco – which are non-compatible with most ethical funds – have been among the top performing over the past 12 months.

She adds: “Defensive sectors such as these do tend to do better during volatile periods and downturns. If the markets turn bullish then ethical funds may experience a renaissance. But bearing in mind the question mark over the economic outlook, ethical funds could struggle to outperform.”

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