Q3 sets record for equity fund outflows
Q3 marked the worst quarter for equity fund outflows on record as investors ran scared of sky-high stock markets, according to the latest Fund Flow Index from Calastone, the largest global funds network. Investors withdrew £1.20bn of their equity-fund holdings in September, taking the Q3 total to £3.64bn, the worst of any three-month run on Calastone’s 11-year record.
September’s net selling means that year-to-date equity funds overall have seen almost zero inflow (just £126m), compared to £22.7bn in the same period last year.
European funds buck the trend
Notably, every major equity-fund sector except European-focused funds saw outflows in September. Global equity funds suffered an unprecedented fourth consecutive month of net selling (£203m), while North American funds shed £146m. Outflows from Asia-Pacific funds extended to their 29th consecutive month (£209m), while funds focused on the UK shed £691m. China, Japan, emerging markets, small cap and sector funds all saw outflows too. European funds stood out, as investors added a net £203m to their holdings. This was the fifth month in a row for inflows to European funds, though even in this one bright spot, net buying in each month has been smaller than the last.
Investor sentiment diverges from record stock market highs
Edward Glyn, head of global markets at Calastone said: “It is really unusual to see markets reaching record highs while investors are moving decisively for the exits across such a broad range of funds. There is a structural bias towards inflows over time as people save for their future so a prolonged period of net selling is noteworthy. Frankly, nobody knows when the next market correction is coming, or even if one is at all imminent. Some parts of the US market in particular do seem to be exhibiting signs of irrational bubble behaviour, particularly those perceived to benefit from the AI boom. It’s tempting to bet against the market when these signs appear, but share prices can defy fundamentals for a long time and that is costly for investors on the sidelines.
“The seemingly unstoppable trend of outflows from UK-focused funds in recent years has been accompanied by strong inflows to equity funds overall, at least until recently. UK funds continue to shed capital, but selling has been more muted in the last four months in the context of a general pull-back from equities. Doubtless, seeing the UK market reach record levels while still not looking expensive has given some sellers pause for thought. But the doom loop of negative commentary on the UK economy with its dire fiscal position, soaring credit spreads, lack of growth and impending tax rises may now be winning out. Outflows are on the rise again.
“Only Europe is benefitting most clearly from a rotation towards lower valued stock markets.”
Safe-haven flows lift bonds and money markets
Fixed income and money market funds were the main beneficiaries of caution on equities in September. Between them they absorbed £895m of new cash, of which £610m was committed to bond funds – mainly corporate bonds funds and flexible funds where managers have discretion to switch between fixed income sectors, credit qualities and durations, depending on market conditions. Money market funds, which are the lowest risk category of investment fund absorbed £285m.
Edward Glyn added: “The safe-haven status of money market funds and today’s attractive yields on bonds make them an obvious place for investor cash to flee to when nerves over equity markets abound.”
Property funds back under pressure
Meanwhile, property funds, which had seen outflows shrink markedly over five months, once again saw a sharp increase in net selling. The £85m outflow was the worst since April.
