Equity funds see record inflows as investors target vaccine hotspots in high hopes for post-pandemic boom ______

British investors added record new capital to equity funds for the second month in a row, according to the latest Fund Flow Index from Calastone, the largest global funds network. Net inflows hit a record £2.98 billion in April and took the year-to-date total to £7.93bn, easily the best start to a year since Calastone began recording figures in 2015. The last six months have seen four of the best months of inflows to equity funds on record. At 55.7, Calastone’s FFI:Equity was the most positive reading since April 2020.

Investors favour global, North American and UK funds above European funds

This does not mean buying has been indiscriminate. Investors were most enthusiastic about global funds, which absorbed £1.59bn, North American funds, which saw record inflows of £576m and UK equity funds [ie funds focused on UK equities] which enjoyed inflows of £303m. In the last three months, a turnaround in sentiment towards the UK means UK equity funds have recouped all the outflows from the previous six.

European equity and equity income funds are out of favour, although equity income funds are seeing a marked slowdown of outflows

Equity income funds had their best month in almost a year, although they remain out of favour. As dividend cuts swept the world in the second quarter last year, with the UK market especially hard hit, outflows from income funds (which have a significant UK-equity bias) accelerated to record levels, and had reached £6.3bn by the end of March. In April, outflows fell by more than nine-tenths to just £50.2m. The reduction came as signs emerged that the dividend drought has come to an end[1]. Turnover in income funds was also high.

European funds remained out of favour too, as Europe lags behind the UK and the US in its vaccination drive. Although outright outflows ceased in February inflows are since then have been negligible. Investors added just £27m in April, just 91p out of every £100 they invested in equity funds. Moreover, turnover in European funds was its second highest on record. When high turnover does not result in significant inflows or outflows, it indicates widely diverging sentiment among investors.

Active funds continue to fight back hard against passives – in April active inflows came in comfortably higher than passive ones, even without help from ESG

Once again it was the active fund industry that fought most successfully for the new cash. In five of the last six months, active funds have now done better than their passive counterparts, after losing out in almost every month for three years before that. Active funds accounted for 70% of April’s equity inflows, but for the first time, this was not mainly down to the boom in ESG funds. Non-ESG active funds attracted exactly twice as much new capital (£1.38bn v £692m) as ESG active funds. Active global equity and active UK equity funds were the main beneficiaries.

This is not to say ESG funds had a bad month. After their bumper March, ESG equity funds saw inflows drop back to £718m in April, though this was still almost three times the inflows in April 2020.

Total inflows across all asset classes hit a record £6.1bn in April

Although no other individual asset class has enjoyed record inflows for some time, put together, the total value of inflows to funds of all kinds also broke a new record in April. Total net inflows reached £6.1bn, thanks to the strongest buying of mixed asset funds since April 2018, above average bond fund buying, and sharply lower outflows from property funds.

Edward Glyn, head of global markets at Calastone said: “The pandemic is claiming more lives than ever around the world, but in the UK and North America it is in retreat, the situation in Europe is improving, and it remains under control in most parts of Asia. Stock markets have been on a gently rising trend, while bond yields which are bad for share prices when they rise, have been steady. Investors are looking to the post-pandemic boom that seems increasingly likely to take off in a synchronised fashion across the developed world. Households are sitting on top of record balances of unspent cash. Some has been doubtless earmarked for a bit of much-needed frivolity, but they are investing some of it too and funds are seeing inflows surge as a result.”

[1] Link UK Dividend Monitor Q1 2021