Cash-rich Australian investors ploughed record new capital into managed funds in 2021 ______

Ross Fox - Head of APAC

Australian investors ploughed almost three times as much cash into managed equity funds in 2021 as they did in 2020, according to the latest Fund Flow Index from Calastone, the largest global trading network for managed funds. They also more than doubled their subscriptions for fixed income funds.  Across all asset classes, inflows soared 162% to A$35.7bn, up from A$13.6bn in each of the previous two years. Record inflows in Q3 meant the quarter accounted for over two-fifths of the annual total. Nevertheless, inflows in the fourth quarter were also strong – at A$8.0bn, Q4 was the second-best quarter for Australian fund flows on Calastone’s record.

Equity funds saw booming inflows in 2021

Equity funds saw the biggest increase in 2021, with fund inflows of A$15.0bn, up 174% over the year.  This marks a A$9.5bn rise on the A$5.5bn which equity funds received in 2020. The net inflow was also almost eight times larger than 2019 respective flows, (see Figure 3). Data from Calastone’s Global Fund Flow report, also out this month, shows that Australian investors shared a global enthusiasm for equity funds in 2021 – those overseas increased their net buying of equity funds by an almost identical amount, +164%.

Q3 saw buying peak, but risk appetite waned towards the end of the year

Almost two thirds of Australian equity fund purchases (A$9.6bn) took place in the second half of the year, as the vaccine programme encouraged hopes that the pandemic was coming to an end. The late start of the Australian vaccination drive meant that the surge in inflows in Australia took place a little later than in the UK, Europe and Asia, however, most of the buying was in the first half of the year.  July was the most positive month of all in Australia, but net inflows dwindled with each successive month, falling from A$3.1bn in July to A$1.0bn in December as both rising inflation and the sudden appearance of the Omicron variant in November dampened investors’ spirits.

Australians opted to go global in 2021

Notably, Australian investors adopted a more internationalist approach in 2021 than in 2020. Two thirds of their purchases in 2021, equivalent to A$8.3bn, were in equity funds focused on overseas markets, compared to only just over half in 2020. So, while inflows to domestically-focused funds rose 126%, those focused overseas rose 186%. The vast majority (91%) of this was devoted to global funds, rather than equity funds that invest in a specific theme, region or sector (marked other). With one third of new capital allocations flowing to managed funds investing in ASX stocks, local investors nevertheless remain more interested in their home market than some of their peers. Calastone’s global data shows, for example, that UK and Hong Kong investors actually withdrew cash in 2021 from domestically-focused funds and opted entirely for international offerings instead.

Figure 1: Calastone net fund flows across selected equity categories, all AU domiciled

Smaller companies funds were big beneficiaries of higher risk appetite in 2021

In common with investors elsewhere in the world, Australians also become more enthusiastic buyers of smaller company funds in 2021. Again, this wave came a little later than elsewhere, around the middle of the year, as appetite for risk took longer to return in Australia than in many other countries. By the end of 2021, interest in smaller companies had waned significantly, though it remained ahead of 2019 and 2020. For the full year, local investors added A$509m to smaller company funds, having been net sellers in the previous two years.

Fixed income inflows fell victim to rising inflation, but benefited from Omicron fears

Fixed income funds also had a good year in 2021. Net inflows rose to A$10.5bn, more than doubling from A$4.3bn in 2020. As the ASX reached a mid-winter peak in August, investors dialled back their equity purchases and increased their bond holdings. But as inflation became an increasingly live issue through the spring, interest in fixed income funds ebbed to more typical levels in October and then fell in November to the lowest level since April. Inflows to bond funds partially rebounded in December, however, as Omicron spread rapidly around the world and in Australia.

Real estate funds saw inflows lag, but saw better inflows than peers abroad

Among other asset classes, real estate was a relative laggard. Inflows rose by a quarter to A$1.9bn, though this contrasts with outright outflows for the third consecutive year in the UK and the rest of Europe, where the impact of the pandemic has been much greater. In December, real estate inflows fell to just A$22m, one of the three weakest months in the last three years. Mixed asset funds saw inflows triple to A$6.9bn, growing much more quickly than among peers abroad.

Figure 2: AU domiciled real estate managed fund flows

Ross Fox, Head of APAC at Calastone said: “Australians have saved in record amounts during the pandemic, stowing away a seventh of their disposable income in 2020/21, almost three times more than in 2019. They were rather cautious with all this cash in the first year of the pandemic. But by 2021, as a clearer exit route emerged in the form of vaccines, fund flows responded dramatically. The flood of capital into managed funds in 2021 is a direct consequence of both higher risk appetite and piles of ready cash on household balance sheets. They are not alone. Investors around the world have behaved in a similar way.

The loss of appetite for risk by the end of the year reflects the national sigh of resignation as Omicron reached Australia’s shores. But this was no rout. December’s equity inflows were just a third of the peak in July, but they remained above the average for the last three years. The signs from abroad are positive too. After initially greeting Omicron with real caution at the end of November, investors in many of the other countries Calastone serves generally considered that it is not a threat to stock prices and chose to increase their equity fund purchases in December.”

Figure 3: AU domiciled Fund Flow Data recorded across the Calastone Network

Methodology

Calastone analysed over half a million buy and sell orders every month from January 2019, tracking capital from advisers, platforms and as it flows into and out of managed 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 95% of Australian managed fund flows 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.

The index is a measure of investor conviction, placing the net flow of capital into the context of overall trading volumes. It also allows the reader to compare flows in asset classes of different sizes – A$100m of inflows may be very large for a small, relatively new asset class like ESG equity but very small for a huge category like fixed income. 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 FFI considers transactions only by Australia-based investors, placing orders for funds domiciled in Australia. The majority of this capital is advised, via platforms.