Dash for cash: why fund investors kept their distance from shares, bonds

Panicked fund investors pulled money from every asset class in the March quarter bar one: cash.

Cash was the standout asset class in coronavirus slump, accumulating more than $18.2 billion of inflows over the quarter, according to Morningstar's latest Australian Asset Flows – March 2020 report.

Meanwhile, investors sought to stem their losses by ripping money from equity and bond funds in a wild quarter for markets. International equity funds experienced outflows of $3 billion, a turnaround from the previous quarter’s increase of $208.1 million.

Australian equities fared better than their international counterparts, with net outflows of $553.5 million over the same period.

Morningstar analyst Peter Gee says this is the largest single quarter of inflows cash has received in five years.

"To put this into perspective, the next largest inflows to cash was a mere $1.3 billion in September 2015," he says.

Fund flow by asset class ($ billion)

Captures estimated net flows at the individual product level

Source: Australian Asset Flows – March Quarter 2020, Morningstar

The move to cash can be attributed to two likely impulses: fear and opportunity. According to a Morningstar survey of investor sentiment, investors are increasingly doubtful about a mooted turnaround.

UK-based retiree Andrew Bartram told Morningstar he took profits and increased his allocation to cash to weather the downturn.

Bartram expects the volatile stock market conditions to last for several years, particularly with a serious recession looking likely in many countries, so is anticipating sitting in cash for some time. “I don’t think the recovery will be quick, and I think there may be further falls to come too,” he says.

Super switch: out of Balanced and into Cash

Cash funds which received the largest inflows were AustralianSuper Cash, CFS Wholesale Institutional Cash, AustralianSuper Pension Cash and Macquarie Treasury.

Morningstar data shows members in Australia's largest super fund added over $5.9 billion to its Cash option over the quarter. AustralianSuper confirmed it saw a wave of members switching from the most popular (and default) Balanced option to Cash online, phone call or via the app.

“In the unique market circumstances that have prevailed over the past few months, AustralianSuper has seen an increase in the number of members switching between investment options," fund spokesman Stephen McMahon says.

"It is however still very small in comparison to the overall fund.

"Some members have tried to deal with this volatility and mitigate losses by switching out of the Fund’s Balanced Option into the Cash Option."

AustralianSuper invests over $180 billion on behalf of more than 2 million Australians.

The mad cash dash comes as central banks slash interest rates. The Reserve Bank of Australia cut the cash rate twice in March, taking it to a record low of 0.25 per cent.

AustralianSuper members switched from Balanced to Cash in March 

Monthly estimates net flows, 01/01/2020 - 31/03/2020

Source: Morningstar Direct

AustralianSuper is not an isolated example. Members from a range of super funds responded to the severity of the market downturn by moving their retirement savings into cash. Brisbane-based Sunsuper reported an unprecedented number of phone calls from panicked members.

Another major fund, UniSuper, reported its members had moved billions from growth investment options into defensive options, principally cash, while data from Colonial First State (CFS) showed 39 per cent of its members who switched their super moved to cash.

CFS says their switch call volumed peaked on 23 March, the lowest point recorded on the S&P/ASX 200 this year.

The problem got so bad that UniSuper chief investment officer John Pearce made a plea by video to urge the fund's 450,000 members to reconsider switching.

“The main objective (of the video) was to stem the flow of switching from our members and I’m told by our call centre that it has definitely had an impact," Pearce said.

Quarterly estimated net flows by category to super funds

Source: Morningstar Direct

How panic can crystallise losses

According to Industry Super Australia, members who moved their money from a balance fund into cash during the 2008 Global Financial Crisis were $4,000 worse off after three months. After a year, this blows out to $13,800; and after seven years, they would have potentially lost $46,000 in retirement savings.

ISA chief executive Bernie Dean said it’s understandable that people feared the impact the virus would have on the economy and their superannuation balances. However, he reminded members that super is a long-term game and that markets recover.

“A way to lose money in super after a downturn is to make changes that crystallise your losses," he says.

Debby Blakey, chief executive of healthcare workers fund HESTA, made a similar plea to its members to consider the long-term implications of moving to cash.

"Changing your investments to defensive assets now may mean you miss out when markets do eventually rebound," she said.

AustraliaSuper confirmed that some members put their funds back to work in the June quarter. But the flows pale in comparison.

Savvy investors who figured out when to re-enter the market were richly rewarded as the market rebounded S&P/ASX 200 rebounded 21 per cent from 23 March to 17 April.

Global stock markets stage a strong recovery from 23 March low point to 17 April

Source: Thomson Reuters

Dramatic drop

The Australian fund sector continued to attract inflows over the quarter, albeit at a significantly slower pace.

"Australian managed funds on aggregate had net inflows of $927.5 million over the March quarter," Gee says.

"The latest result is a dramatic drop from the aggregate net inflows funds experienced over the previous quarter of $13.9 billion."

Funds quarterly flow ($ billion)

Captures estimated net flows at the individual product level 

Source: Australian Asset Flows – March Quarter 2020, Morningstar

Australian ETP assets decreased by more than $4.6 billion in the March quarter to $56.4 billion. Morningstar's Gee says the drop in total assets can be attributed to the underlying market conditions over the first quarter of 2020, rather than net outflows.

Vanguard Australian Shares ETF received the greatest inflows over the quarter with $713.6 million followed by ETFS Physical Gold ETC with $280.2 million and SPDR S&P/ASX 200 Fund with $230.4 million.