Article written by InvestNow

Almost a year to the day since global share markets plunged to lows more than 30 per cent below pre-COVID peaks, investors probably still look back in disbelief at what seemed, for most, escape from certain disaster.

The sharp fall in global share indices was triggered by rising fears of economic catastrophe in the wake of pandemic-fighting lockdowns. While some predicted a crash of 1929 ‘Great Depression’ proportions to follow, markets instead experienced the quickest rebound in history from the March 23 bottom.

By April 2020 investors of all stripes had piled back into equities, pushing share benchmarks to new highs. Despite ongoing volatility, investor optimism – and participation – continued to climb for the remainder of last year as the ‘recovery’ narrative took hold.

Undoubtedly, the crash-and-bounce story arc of 2020 has had a profound effect on investor behaviour, which shows up clearly in a new InvestNow analysis.

Rush to the risk exit

Mike Heath, InvestNow general manager, says just-released annual data from the fund platform reveals members in aggregate sold out of all assets except cash during the peak pandemic month of March.

“We saw a clear swerve away from risk assets in March when news of the coronavirus lockdowns first broke,” Heath said. “But by April NZ investors were back on the growth road with a notable preference for shares, especially via global equities vehicles.”

The InvestNow figures, which track the net fund choices of members over the 12-month period, also highlight a notable post-March turnaround in asset class choices compared to 2019.

A similar analysis in 2019 found a surge of support for property funds among platform investors with the proportion of members exposed to the sector doubling over the year. As well, the 2019 annual period saw InvestNow members diversifying into local and global fixed income funds – although not at quite the same scale as per the property trend.

But while fixed income funds continued to garner some investor interest during the final three-quarters of 2020, the data shows COVID had put a serious hole in demand for listed real estate, Heath said.

“Listed property, probably the strongest performer in 2019, struggled to regain support after March last year,” he said.

“While fixed income attracted mixed flows for the last three quarters of 2020 with investors generally favouring global bond funds over NZ fixed interest.”

Global equities lead the way up

Shares, however, remained the stand-out asset class for InvestNow members last year, recovering from the March dip to record nine solid months of positive flows that increased particularly in the final quarter of 2020.

Net inflows into equity funds were about 40 per cent higher in November and December last year compared to the previous peak months of January and April, according to the analysis.

“And during the entire year, global share funds were at least twice as popular every month as Australasian counterparts,” Heath said.

Even in March the international equities sector held up well, he said, with almost net zero outflows compared to the relatively large exodus from Australasian shares.

“The preference for global shares likely reflects a growing investor confidence of a larger recovery in markets that have been hit hardest by COVID – NZ and Australia have been fortunate in escaping the worst of the pandemic,” Heath said.

Diversified funds make a late appearance

Another trend emerging from the InvestNow data shows investors are also looking for strategies to protect their portfolios against a market downturn.

Diversified funds, where professional managers determine the mix between growth and defensive assets, saw a significant spike in flows on the platform in the December quarter, especially.

“In fact, diversified fund flows were neck-and-neck with Australasian equities products in the last three months of the year,” Heath said. “Possibly, investors were becoming increasingly cautious about rising equity markets but less confident about managing the risk themselves through direct exposure to fixed income assets.”

Members also had a wider choice of mixed-asset products late in the year following the launch of the InvestNow KiwiSaver Scheme, which includes the new range of Hunter diversified funds.

Active-passive break-out trend

If COVID had a discernible impact on asset class exposure last year, the pandemic, too, disrupted the balance between active and passive strategies on InvestNow.

Index-investing has definitely grown in popularity on the platform but active funds still retain strong support – many investors use both approaches when creating diversified portfolios.

The coronavirus shock last year, though, sparked a glaring behavioural split between the active and passive camps. In March 2020, InvestNow reported net positive flows into passive funds in contrast to the outflows from active products.

“Index funds remained almost twice as popular in April and May before a more balanced trend emerged between the two investment styles,” Heath said. “By year-end the split between active and passive fund flows was about even on InvestNow. Perhaps as market volatility continues, investors may be more interested in active strategies, although index funds remain a popular approach – that’s why we are focused on giving our investors a wide range of choice across investment styles and asset classes.”

We may have had a great escape from catastrophe in 2020 but the effects of the COVID crisis still reverberate through markets and investor psychology. Heath said InvestNow would keep evolving to meet the changing needs of investors over time.

“Last year included enormous real-world and financial shocks – as well as the most surprising share market recovery of all time,” he said. “Through it all, InvestNow functioned perfectly, allowing investors to efficiently express their choices in a difficult period. Of course, our data shows members were not immune to market movements but there was no mass panic and investors were able to quickly reset their investment strategies in line with long-term targets.”