Equity fund inflows picked up in September, but investors are nervous ______

Investors took a back seat in September, cutting back on the capital they added to fixed income, mixed asset funds compared to recent trends, according to the latest Fund Flow Index from Calastone, the largest global funds network. They increased their buying of equity funds to the highest level since May, but even so appetite was muted. Fund inflows across all asset classes were just £1.1bn, half the long run average, and despite UK savers having stashed a record additional £77bn of cash into savings accounts earning near-zero interest rates in the first half of 2020[1].

On the detail, inflows to fixed income funds fell sharply in September, dropping to £193m, following several months of strong demand as market rates compressed to record lows as the Covid-19 recession crushed economic activity. Inflows to mixed asset funds, the stalwarts of regular savings plans, were just £117m in September, well below the £397m monthly average for the last year.

In this context, the £385m inflow to equity funds looked strong, and indeed it was the highest since May in what has been a very volatile year of inflows and outflows for the sector. Nevertheless, in the longer-term context this inflow was below average. It did, however, mask significant differences between equity categories.

The big winners were ESG equity funds, which saw £588m of inflows (active plus passive ESG), while traditional equity funds without an ESG mandate suffered outflows of £203m.

Equity index funds also benefited, enjoying £747m of inflows while active funds suffered a fourth consecutive month of outflows, totalling £362m in September.

From a geographical perspective global funds remained the firm favourite (inflows of £831m) and European funds managed a second consecutive positive month, following years of outflows. But investors continued to shun UK-focused equity funds which have also now suffered four months of outflows in succession, and income funds (which tend to have a strong UK-equity bias). The chart below shows how UK equity funds have consistently been less popular than global funds over the least three years.

All the buying of equity funds took place in the first two weeks of the month as investors took advantage of a dip in stock markets following the market peak at the end of August.

Edward Glyn, head of global markets at Calastone said: “Investors are nervous. The vast sums of cash accumulating in households’ savings accounts are not finding their way into asset markets as savers both add to their rainy-day funds and fret about taking on more investment risk at a time of such uncertainty. Even so there are clear bright spots and clear no-go areas. UK-focused equity funds seem condemned to the doldrums unless the Brexit talks yield a positive outcome and income funds are out of favour while the dividend pain is prolonged. But the strong demand for ESG funds shows that an interesting story can still drive investor demand, while the appetite for global funds suggests that investors recognise the value of diversifying their equity investments at a time when unexpected good and bad news can come seemingly from any direction at any time.”

[1] Source: Henderson Investment Trusts, Bank of England

METHODOLOGY

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.