In the dynamic landscape of UK fund management, staying ahead is not just an advantage, it is imperative.
This is why it is so vital for managers to have a clear picture of who is buying which funds and why. And, perhaps more importantly, which players are winning and which are having a harder time.
For nearly 20 years, the Pridham Report has been providing this intelligence, leveraging data supplied by over 40 of the largest fund groups operating in the UK and covering over £1 trillion in assets.
The latest report told us that Q3 ended on a sour note, with only four in 10 (38%) of the UK’s largest funds groups growing net sales – breaking a streak of three straight quarters where this figure has exceeded 50%.
But what should fund managers be looking out for in Q4? Based on the data, our advice would be to keep four key themes front of mind.
Will investors return?
There was a sense of guarded optimism among fund groups at the end of the second quarter. This dissipated with September’s outflows. Q4’s investor sentiment is anyone’s guess.
Q3’s negative flow picture appears to have been driven by political uncertainty. With the UK budget and US election now cleared, much of this uncertainty has been reduced. Early market performance has been positive since Trump’s US election victory.
Q4 may therefore see a return to the sunnier times leading up to September where investors could be seen coming back off the sidelines. UK investors continue to hold record amounts of deposits giving hope that a new dawn is on the horizon for fund groups who have been flow starved since the pandemic. Investor sentiment, however, may remain only a market wobble away from turning back for the exits.
Will rate cuts fuel active fixed income demand?
Fixed income demand finally started to show through in Q3, at least in terms of improved net sales. Much of this improvement came from passively managed fixed income solutions. There is a sense, however, that yield generation has been relatively straight forward as rates have stayed elevated. And that opportunity will be created for active managers as lower rates lead to more duration and credit quality conditions needing to be made, if investors want to keep portfolio yields healthy.
Q3 saw multiple managers catch the wind in their sails from active high-yield offerings. Hinting that investors may be broadening their horizons in the search for yield. How investor demand evolves as rates and economic conditions change, will be an essential watch for managers in Q4.
Potential wider returns variation for active managers
Signs continue to be seen and heard that equity interest is going beyond US and growth-oriented large-caps. Will Q4 be the quarter where this is demonstrated en masse and evolves beyond an individual fund group story?
Equity income was one such theme that shone through across multiple fund groups. This trend was first picked up starting in the Q2 results. Demand for such solutions being a function of equity being both an attractive yield generator and a diversifier against growth-oriented equity portfolios.
Now the question is whether this will continue to broaden. Is Q4 when Europe, emerging markets, small-cap and even UK equity, take centre stage over global and US offerings?
Who’s really driving the decisions?
Ultimately, predicting future fund sales isn’t just about the markets, but understanding who the key portfolio decision makers are, something that has been rapidly evolving in the retail arena over the past decade as retail flows become concentrated amongst a set of gatekeepers driving centralised investment propositions.
Adapting to this environment is leading to more partnerships being formed at the entity level between fund managers, gatekeepers and/or distributors, and a refinement of market segmentation, to better identify the true decision-maker behind today’s investment decisions.
Moving forward, managers must ensure they have a clear understanding of the different decision makers at play and who is influencing them. Most importantly though, they must be prepared to tailor their distribution strategy to needs of the different stakeholders they will be dealing with (e.g. MPS portfolio managers, IFAs).
Retail investors and their advisers will continue adjusting their allocations to reflect the ever-evolving market environment. Staying abreast of these four themes, and keeping a pulse on today’s portfolio decision-makers, will stand managers in strong stead to stay at the top of their game.
The Q4 Pridham Report is expected to be published the third week of February. Follow us on LinkedIn to hear about future updates.
By: Benjamin Reed-Hurwitz, EMEA Research Lead, ISS Market Intelligence
