Our 12-month forecast for the UK domiciled investment fund market is a mix of sun and cloud, with organic growth expected to be 1.5%[1]. Surprised by our relatively sunny forecast?
With the terms such as war, inflation and recession currently on an apparently endless replay in the media, no one can be blamed for having a pessimistic view of the immediate future. Investing, however, is a long-term endeavor and investment trends are not only impacted by today’s headlines but equally by those of the past and of tomorrow. Key secular trends, led by demographics, could provide fund flows a significant buffer against the current clouds, and are central to our thesis that sun is on the horizon.
Demographics: Adding fuel to the positive momentum for fund sales are the double-bill of Gen X (time to wake up to this generation’s potential) entering crunch time for retirement savings and the need for millennials to start hitting their savings stride en masse. While millennials may have been slow out of the financial wealth accumulation gates—thanks to a combination of significant student debt, high house prices and a weak post-financial crisis job market—increasingly their attention will turn to retirement planning, with the need for aggressive savings plans a likely outcome. Demographic uncertainties include whether Baby Boomers will go for broke with their retirement funds or follow a wealth transfer route similar to their parents, as well as how the whipsaw returns on crypto and equity markets impact Gen Z’s saving and investment appetite. Look out for future coverage from us on the impact of this rapidly evolving demographic make-up of the investor universe—or as we call it “the rise of the four-headed demographic Hydra”—and its impact on the addressable market for investment fund manufacturers and distributors.
Economy: As rates rise and recession indicators turn redder, it is easy to take a pessimistic view of the impact of the economy on fund flows. Household budgets will no doubt come under strain facing higher inflation and higher rates on consumer debt. The impact though will not be uniform across the wealth spectrum. Higher inflation, beyond simply acting as a strain on budgets, also alters the appeal of holding cash longer-term, a fact that could lead to cash flooding into equity and/or property markets at a higher than predicted rate. Whether inflation acts more as a restraint on flows or as an impetus for investors to convert cash into assets with inflating valuations, will be central to whether the sun breaks through for much of the next 12 months.
Regulation: That the FCA’s upcoming Consumer Duty and ESG rules will have an impact on the fund arena is not up for debate. How the impacts of any new regulations will manifest themselves in terms of fund flows is less clear. Incoming rules may in fact not have an aggregate impact on the business but certainly create a fog when trying to predict the winners and losers of tomorrow.
Barring a deeper than predicted recession, our forecast is for the sun to shine during the next 12-months based on the expectation that “savers are gonna save”. Secular demographic trends possess the potential to act as the umbrella for fund flows during any economic downpours.
Up next we will take a deeper dive into flow projections at an asset class level. The above forecast was generated using our global fund platform, Simfund Global, and fund analytics platform, Flowspring.
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1 The forecast includes investment trusts and excludes Money Market funds and ETFs.
By: Benjamin Reed-Hurwitz, Vice President, EMEA Research Leader ISS Market Intelligence
