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.”
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.