Investors return to riskier funds

Private investors are buying into funds at record levels, and favouring higher-risk sectors such as commercial property and emerging markets, according to the latest sales figures. But financial advisers expect a more cautious approach in the year ahead, as confidence in equities and sterling is falling.

Data released this week by the Investment Management Association (IMA) showed that net retail fund sales in November 2009 were above £2bn for the eighth month in a row, taking the total invested in the first 11 months of the year to £23.6bn – more than 10 times the level at the same point in 2008.

Investments through tax-efficient individual savings accounts (Isas) accounted for £2.6bn of this total – the highest level since 2002.

Total funds under management reached £467.3bn – 38 per cent higher than the total at the end of November 2008 – due in part to the increased inflows, but also to the 20 per cent recovery in equity markets over the 12-month period.

This recovery attracted more private investors into equity funds than bond funds for a third consecutive month. Net retail sales of equity funds reached £930m in November – nearly five times the £187m invested in bond funds in the same month.

More than a quarter of this equity investment – £281m – went into global emerging markets funds, making them the second- most popular fund choice.

But the overall best sellers, for a second month running, were commercial property funds, which took £417m in net retail sales – the highest level since March 2007.

Peter Day, of broker Killik & Co, said the figures demonstrated “a definite increase in risk appetite” in the past nine months.

Tax changes and unattractive rates on cash deposits have also contributed, according to Henry Denne of Punter Southall Financial Management: “Low interest rates caused income-seekers to invest in higher-yielding bond funds early in the year, while Budget restrictions on pension contributions for high-income individuals led to lump sums being invested in funds,” he said. “Finally, the rising stock market since March encouraged investors to participate in the momentum of the rally.”

However, investors are less confident that the rally can continue in 2010. The IMA’s Investor Confidence Index has now fallen to 99 – below the neutral level of 100, and seven points down on the high of 106 recorded in May 2009.

While this reading is still ahead of the low of 71 a year ago, the related Investor Intentions Index has fallen to 91 from a high of 99, with 41 per cent of investors planning to reduce their higher-risk holdings in the coming months.

Killik & Co is already seeing evidence of this. “It is the defensive sectors where we have seen the biggest demand,” said Day.