Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Fund flows drop during first quarter market turmoil
Australian investors’ appetite for equities dropped in the first quarter of 2022, especially for international shares which have dropped more than Australian shares. Following record inflows to managed equity funds in 2021, the value of inflows between January and March 2022 plunged to $1.2 billion, falling from a quarterly average of $3.8 billion last year, according to the quarterly Fund Flow Index from consultancy and research house Calastone.
Over the first quarter of 2022, February was the weakest month, with inflows into equity funds falling to just $25 million, the worst month since June 2020. Inflows in January fell to $581 million compared to December 2021 as global stock markets fell on rising bond yields and inflation. Inflows into managed equity funds rebounded slightly in March, heading back to $592 million.
Australians prefer local funds
The Calastone Fund Flow Index found that Australians have cut back on their overseas investments far more than their Australian equity allocations. On average over the last three years, Australians have devoted one third of their newly invested cash to managed funds that invest solely in Australian equities. In the first quarter of 2022, this proportion jumped to 78 per cent. Australia-focused funds attracted inflows of $931 million, down by 25 per cent compared to the final quarter of 2021, while those investing overseas dropped far more to $327 million, down by 80 per cent.
Teresa Walker, Calastone’s managing director of Australia and New Zealand, said risk appetite globally fell during the first quarter as economic worries and inflation were compounded by Russia’s attack on Ukraine.
“This explains why inflows to equity funds have fallen. But the much smaller decline in inflows to Australian-focused equity funds reflects the strong commodity bias on the ASX. Share prices for Australia’s mining giants have soared during the quarter as sanctions on Russia have pushed up the price of ores and energy, providing a measure of protection for Australian funds not afforded to US tech giants, for example,” Ms Walker said.
Reflecting that, the Australian share market has outperformed the US market over the year to April 13. While the S&P/ASX 200 has risen by 0.3 per cent, that compares to falls of 7.8 per cent for the S&P 500 and 14.5 per cent for the Nasdaq Composite Index. Reflecting higher commodity prices, shares in BHP and Rio Tinto have gained by 24.5 per cent and 20.1 per cent as oil and gas prices jumped following Russia’s invasion of Ukraine.
Flows to fixed income dry up
Despite bond funds traditionally being considered defensive investments, investors added just $60 million to fixed income funds between January and March 2022. Investors pulled $173 million from bond funds in March alone, the first time Calastone has seen outflows from the category since the early weeks of the Covid-19 pandemic.
In contrast, Calastone noted that inflows to ESG equity funds of $746 million exceeded those to non-ESG funds ($452 million) for the first time in the first quarter of 2022.
“Fixed income might normally be considered a safer haven in times of risk for equity markets, but the inflation shock associated with war-fuelled energy prices has compounded inflationary,” Ms Walker said.
“Even though inflation is much less of a problem in Australia than in other developed economies at the moment, it is the bogey man stalking credit markets in 2022 – and hence fixed income funds which tend to invest across sovereign and corporate debt worldwide. This is making investors wary of bond funds,” she said.
A separate report from independent investment consultancy, bfinance, on institutional investors’ responses to recent macroeconomic and geopolitical developments, found that investors showed the lowest satisfaction with the performance of fixed income asset managers (just 24 per cent were satisfied).
Several respondents, or 39 per cent, also said that recent geopolitical developments will lead, or have already led to, adjustments of their ESG approach. Several other investors said that while the conflict had not itself affected their processes, it reinforced the need for a sophisticated ESG approach.
While 52 per cent of investors had no direct exposure to Russia heading into the first quarter, nearly half of investors had direct exposure to Russia. During the quarter, 45 per cent of investors with direct exposure to Russia either fully exited (10 per cent) or are in the process of doing so (35 per cent), the latter of which has been caused by obstructions to illiquidity and lock-ups.
