M&G Optimal Income, Fundsmith Equity and LF Lindsell Train UK Equity were among the most bought funds in 2017, according to research by FE Trustnet.
A look at the top 25 most bought funds of last year shows two key themes continued throughout 2017: the rise of passive investing and uncertainty over whether to be risk-on or risk-off.
The passive versus active debate continued to rumble on last year with flows pouring into index-tracking products. As such, passive vehicles made up 11 of the top 25 most bought funds in 2017.
Table of most bought funds in 2017
Source: FE Analytics
Peter Sleep, senior investment manager at Seven Investment management (7IM), said: “I would suggest that advisers are using the diversified passive equity funds as a core and adding value by adding selecting active managers to complement this.”
Among the most popular passive vehicles was the BlackRock ACS 50:50 Global Equity Tracker fund, which saw its assets under management (AUM) soar to £8.9bn from £4.3bn, following positive performance and £4.1bn in net inflows.
The portfolio tracks the performance of the FTSE Custom Composite UK All-Share 50% Dev Europe ex UK 16.7% US 16.7% Japan 8.3% Dev Asia Pacific ex Japan 8.3% net tax index.
Both through its BlackRock and iShares divisions, BlackRock dominates the passive portion of the top 25 most bought funds, accounting for seven of the 11 tracker funds on the list.
The other major theme clear from the table is the level of uncertainty among investors as they wavered over whether to be positioned risk-on or risk-off.
While the global equity sector had the most funds in the top 25 with six, there were five bond funds, three absolute return funds and even a cash fund – showing the varying scale of risk investors were willing to take.
7IM’s Sleep noted: “The list shows that advisers seem to be selecting a balanced mix of funds, both in terms of active and passive funds, but also in terms of equities and bonds.”
Last year was one of uncertainty, with US president Donald Trump taking office, tensions surrounding North Korea, potential political uncertainty in Europe, and ongoing Brexit negotiations compounded by a general election that saw the ruling Conservative party returned with a much lower majority.
As such, the top 25 funds are spread across asset classes, with the most bought fund focusing on bonds: FE Alpha Manager Richard Woolnough and deputy manager Stefan Isaacs’ M&G Optimal Income.
The £22.5bn strategic bond fund returned 5.77 per cent over the course of the year, sitting in the second quartile of the IA Sterling Strategic Bond sector.
Performance of fund vs sector in 2017
Source: FE Analytics
The fund has been in an out of favour in the last couple of years and its AUM remains off its peak of close to £25bn at the start of 2015.
Concerns over the bond market coupled with it narrowly failing to beat its average peer in both 2014 and 2015 meant the fund was hit by significant outflows, with its AUM declining to less than £15bn – a 40 per cent decline.
Yet, 2017 saw the strategy return to favour having beaten the average peer in 2016 by 81 basis points and its AUM rose from £15.9bn to £22.52bn. With £311m attributed to performance, this equated to £6.2bn of net inflows.
The second-most bought active fund was another fixed income strategy, which is surprising given investors’ fear that the bond bull market of the last 30 years could be drawing to an end.
FE Alpha Manager James Tomlins’ M&G Global Floating Rate High Yield saw $3.7bn in net inflows, meaning that overall its AUM rose from $1.4bn to $5.4bn once performance uplift of $240m was taken into account.
The fund, which invest primarily in US denominated floating rate note high yield debt, made a bottom quartile return of 3.07 per cent to investors in 2017 following a poor 2016 when it was the fourth-worst performer in the sector.
However, high yield bond funds have proven popular in the low interest rates era as credit spreads have significantly tightened.
For those investors looking to take an alternative cautious approach, three absolute return strategies made the list of the top 25 most bought funds.
While Standard Life Investments Global Absolute Return Strategies – better known as GARS – was one of the most sold funds, former managers of the fund proved particularly popular.
Both Invesco Perpetual Global Targeted Returns and Aviva Investors Multi Strategy Target Return are run by former GARS managers and made the list of most bought funds.
Investors piled out of GARS at the start of the year after it made a loss in 2016, yet it made a return of 2.34 per cent last year – beating both the Invesco Perpetual and Aviva funds.
Despite this, over the course of the year Invesco Perpetual Global Targeted Returns saw net inflows of £3.6bn taking its overall AUM to £12bn from £8.4bn.
Performance of funds in 2017
Source: FE Analytics
Although it made a loss of £83.8m last year, Aviva Investors Multi Strategy Target Return fund also saw its AUM climb to £5.6bn from £3.2bn, a net inflow of £2.5bn.
LF Ruffer Absolute Return, run by FE Alpha Managers Steve Russell and David Ballance was another absolute return strategy attracting strong inflows in 2017, lifting its AUM to £5.5bn from £3.8bn over the course of the year, although just £44.9m was added through performance.
For those investors throwing caution to the wind, stable, long-term outperforming managers appeared to the order of the day with FE Alpha Manager Terry Smith’s Fundsmith Equity the most bought active equity-only fund.
The five FE crown-rated fund has been the best performer in the IA Global sector since its launch to the end of 2017, returning 261.7 per cent – almost double the MSCI World index’s 136.15 per cent.
Since its launch the fund has never slipped outside of the top two quartiles in the sector in a calendar year, though it did underperform the MSCI World index in 2016 for the first time in its history - albeit by the slimmest of margins, just 8 basis points.
Despite this, the portfolio, which is heavily weighted to quality growth stocks, saw net inflows of £2.19bn, helping to raise its AUM from £9.1bn to £13.4bn.
The other fund of note is the five crown-rated LF Lindsell Train UK Equity fund run by FE Alpha Manager Nick Train.
Like Fundsmith, the UK-focused portfolio has been an outstanding performer over the long term although it underperformed the FTSE All Share benchmark in 2016. It should be noted that it still beat the average peer and sat in the second quartile of the IA UK All Companies sector.
Last year the fund returned to form, paying out a total return of 20.66 per cent to investors – ahead of both the sector and benchmark.
During 2017 the portfolio saw net inflows of £1bn, lifting its overall AUM from £3.1bn to £4.8bn when performance is also taken into account.
FE Trustnet will look at the most sold funds in a later article this week.