Active funds ride the post-vaccine wave while appetite for index funds slows______

Edward Glyn, Head of Global Markets

A strong month for equity funds saw inflows rise to £1.3bn in August, according to the latest Fund Flow Index (FFI) from Calastone, the largest global funds network. Since the sea change in sentiment towards equity funds that accompanied the announcement of successful clinical trials of Pfizer’s, Moderna’s and AstraZeneca’s Covid-19 vaccines in November 2020, investors have added £17.2bn to their equity holdings. This means more than a third of the net inflows to equity funds (35%) since 2015 has taken place in the last ten months alone. Global funds saw the largest net inflows in August (£1.1bn), much of this targeted at ESG offerings. Most other categories saw only modest inflows, though funds focused on UK equities, equity income and Asia-Pacific all suffered outflows.

Index trackers have attracted less capital than active funds in nine of the last ten months

Index-tracking funds fared significantly worse than their active counterparts for the seventh month in a row, and have now seen lower inflows (or actual outflows) in nine out of the last ten months. (In the previous 2.5 years, passive funds have either had lower inflows or larger outflows than worse than active funds in only three months). A net £4m, essentially a rounding error, was added to index trackers in August, compared to inflows of £1.3bn for actively managed funds.

Vaccine approvals proved a key turning point driving appetite for active funds

The change in sentiment towards active funds can also be pinpointed to the big vaccine moment in November 2020.  Three quarters (£12.6bn) of the £17.2bn net new capital into equity funds since November has been pumped into active funds. Between 2015 and that point, by contrast, active funds had only garnered one fifth (£6.8bn) of the £30.8bn committed to equity funds overall. Passive vehicles had previously absorbed the lion’s share.

ESG has boosted active strategies, but even traditional active funds are attracting more capital at present

Certainly, the ESG boom has been a major driver for active funds recently, accounting for over three fifths of active inflows since the November sea-change, but it is increasingly clear that other types of active fund are enjoying a resurgence too. Even if we strip out all the active ESG money, traditional active funds have nosed ahead of index trackers over the last ten months, with inflows of £4.7bn, compared to £4.1bn for their passive counterparts. The total volume of buy and sell orders (i.e. turnover) for equity funds was low in August reflecting a common seasonal pattern, falling to £17.3bn, its lowest level since September 2020. The relatively strong net inflow set against low overall turnover pushed the FFI: Equity to 53.7, a healthy reading well above the neutral 50 mark, where buys equal sells.

Improvement for property funds, but mixed assets are no longer in such high demand

Among the other main asset classes, investors seem to be falling out of love with mixed asset funds. These gathered just £138m of new capital in August, compared to a long-run monthly average of £1bn. They have seen below-average inflows in most months recently. Meanwhile, outflows from property funds fell to their lowest level since February 2020[1], before the pandemic really hit the UK, in a sign that the worst may now be past for the troubled sector.  Fixed income inflows of £500m were exactly in line with the average. Edward Glyn, head of global markets at Calastone explained: “Every couple of years, we have seen a period where investors take a greater interest in active funds than they do in their passive counterparts. The current switch of focus is particularly extreme, with August the third-worst month for passive funds in five years. Turnover levels for active funds are far greater than for their index-tracking counterparts relative to net inflows, however, and turnover is more volatile too. This reflects a greater trading mentality among investors when it comes to their active holdings, while passive funds typically sit more quietly in monthly savings plans. The unusual times we live in seem especially suited to greater engagement by investors with their fund holdings. Certainly, the rise of ESG funds has pulled investor focus from passives too, but we do not expect this to herald a long-term loss of faith in index trackers. Low costs and solid returns remain key attractions that will gradually shift market share of total assets under management in favour of trackers.   Marketing focus by fund management houses should not be underestimated either. It exerts a clear influence on investor decision making, often via the advised route. The loss of interest first in absolute return funds, and more recently in mixed-asset funds reflects a switch of marketing spend to the ESG segment. As a trend establishes and more investors respond, firms develop more products and devote more spend. The process can drive inflows for a prolonged period.” [1] Excluding the months when many/all property funds were suspended from trading


Calastone analysed over a million buy and sell orders every month from January 2015, tracking monies from IFAs, platforms and institutions as they flow into and out of investment funds. Data is collected until the close of business on the last day of each month. A single order is usually the aggregated value of a number of trades from underlying investors passed for example from a platform via Calastone to the fund manager. In reality, therefore, the index is analysing the impact of many millions of investor decisions each month. More than two thirds of UK fund flows by value pass across the Calastone network each month. All these trades are included in the FFI. To avoid double-counting, however, the team has excluded deals that represent transactions where funds of funds are buying those funds that comprise the portfolio. Totals are scaled up for Calastone’s market share. A reading of 50 indicates that new money investors put into funds equals the value of redemptions (or sales) from funds. A reading of 100 would mean all activity was buying; a reading of 0 would mean all activity was selling. In other words, £1m of net inflows will score more highly if there is no selling activity, than it would if £1m was merely a small difference between a large amount of buying and a similarly large amount of selling. Calastone’s main FFI All Assets considers transactions only by UK-based investors, placing orders for funds domiciled in the UK. The majority of this capital is from retail investors. Calastone also measures the flow of funds from UK-based investors to offshore-domiciled funds. Most of these are domiciled in Ireland and Luxembourg. This is overwhelmingly capital from institutions; the larger size of retail transactions in offshore funds suggests the underlying investors are higher net worth individuals.

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