Don’t follow the herd…

INVESTORS are urged not to follow the herd and instead to make their own investment decisions independently of trends. But that’s not to say savers shouldn’t keep up with where others are putting their cash. A report from the Investment Association has revealed the top sectors, asset classes and funds favoured by investors during 2016. In total, retail investors pumped £4.7bn into retail funds, substantially less than the £16.8bn they invested in 2015. Here are the highlights:

The bestselling sector last year was the Targeted Absolute Return with investors pumping in £5.1bn (more than total retail investment for the year!). These funds limit exposure to equities, but open up other regions and asset classes. Their main aim is to deliver positive returns with low volatility over a stated time period.

Should I invest? With concerns about the Brexit vote, the US election and Europe, the global economy has been rather unpredictable making these funds a seemingly safe bet. But don’t be fooled by the name, there are no guarantees you will make money. Even when stock markets rise, many funds achieve little more than cash-like returns. Plus they are typically pretty expensive and currently under investigation by the Financial Conduct Authority to check that funds operate competitively and to the benefit of retail investors.

Money market funds saw record annual net retail sales of £2.4bn in 2016, up from £704m.  The uncertain environment boosted their fortunes. These funds largely hold cash and cash-like instruments.

Should I invest? 

Holding some cash is sensible but too much will erode the value of your investment thanks to the destructive force that is inflation — and it’s on the rise.

Property funds were at the bottom of the list. They had a tough year which saw a number of them suspend trading following the Brexit vote. Just under £2bn in 2016 was withdrawn from these funds compared to £2.7bn being invested in 2015.

Should I invest?

The outlook for property is mixed, depending on who you ask. Some analysis has suggested that UK commercial property investment will be hindered by a combination of Brexit and regulatory intervention. But there seems to be a recovery of sentiment. While last year funds shut their doors to stop savers pulling all their money out, the Columbia Threadneedle UK Property fund, is now so much in demand that it is taking action to stem some of the inflows. Property offers a steady income away from the stock market so a valid alternative to include in a portfolio.

By region, global equity funds were the bestselling in 2016 with sales of £2.6bn, with savers hauling their money out of North American, Japanese, Asian, European and UK equity funds in global funds.

Should I invest?

Global funds have become increasingly popular in recent years as investors have sought to diversify their portfolios. It makes sense to choose a global fund to get exposure to the best stocks combined rather than limiting investment to one country. This way you can get access to several different markets, industries and economies in one fund.

Tracker funds saw net retail sales of £4.9bn in 2016 down from £6.7bn in 2015. Tracker funds under management, however, stood at a record high of £141bn at the end of 2016 as a result of markets riding high.

Should I invest?

Tracker funds are ideal for first-time investors because they are easy to understand, and you don’t need to keep watching your fund manager to make sure they are making the right decisions. They are often cheaper than actively managed funds because they do not need to employ fund managers —that’s because they are run by computers and replicate stock-market indices.

However, not all tracker funds are good value so choose carefully. According to a report by investment research firm Square Mile, the most expensive passive fund in the UK All Companies sector carries a charge of 1.43% compared to just 0.06% for the cheapest.

While there’s a place for passively managed funds in a portfolio, it’s important to mix them with actively managed funds too.

The bottom line is that you should choose funds according to your own circumstances and appetite for risk. It’s also important to spend some time putting together a balanced portfolio. Experts are unanimous that following trends will result in getting your fingers burned.

If you feel like choosing is too much like hard work, employ a financial adviser. Find one at unbiased.co.uk or vouchedfor.co.uk.

Article is accurate at date of writing.