ESG funds accounted for 90% of inflows in July as the ESG gold rush saw its second-best month on record ______

Inflows to equity funds drifted lower in July as investors grew more concerned about global growth and the high value of stock markets around the world. The latest Fund Flow Index, from Calastone, the largest global funds network, showed that net inflows to equity funds fell to £1.12bn, around half the average monthly inflow over the last six months (£2.05bn). However, most the impact was felt by index funds, with strong inflows into active funds, primarily on account of continued demand for ESG equity funds which were major winners amongst investors.

ESG equity funds accounted for 90% of July equity fund inflows – and most of this capital was actively managed

The big winners were ESG equity funds, which saw net inflows of £995m (89.5% of July equity fund inflows), the second-best month on record for ESG. More than nine-tenths of this ESG capital flowed into active equity funds, helping explain why active funds overall held up so much better than their passive counterparts.

Index funds suffered most, but active funds saw strong inflows

Notably equity index funds suffered most. Inflows dropped to £39m, their second-worst month in over five-and-a-half years[1]. Inflows to passive funds in July were 90% lower than their long-run monthly average. Inflows to active funds, by contrast, held up remarkably well, totalling £1.08bn for the month, thanks to strong demand for ESG strategies.

ESG equity fund flows are concentrated in global equities but their dominance is fading as other categories, especially specialist sector funds, garner investor attention

Since 2015, inflows to ESG equity funds have totalled £11.6bn – astonishingly 99% has flowed in since August 2019. The vast majority of this cash has been devoted to Global ESG equity funds – in 2020, for example, 81% of ESG equity fund inflows were to this category.

Calastone’s analysis demonstrates that investors are now increasingly fine-tuning their ESG fund purchases. Year-to-date, Global ESG equity funds have garnered only two thirds (66%) of new ESG equity capital, while in July, the figure dropped to 52%, the lowest ever reading.

ESG equity funds with more targeted geographical or sector focus have begun to take a greater share of new inflows. For example, this time last year ESG UK equity funds had still not made up for years of steady outflows pre-2019, but inflows have now picked up sharply, totalling £607m year-to-date. In July, £1 in every £12 flowing into ESG equity funds was devoted to those with a UK focus.

ESG Sector funds, a fairly new category which mainly comprises sustainable energy, water, general environmental, and infrastructure specialists, have been particular winners. Year-to-date they have garnered £764m in inflows, two thirds of all their cumulative inflows since 2015. In July £1 in every £4 flowing into ESG equity funds has been to this category.

2021 has also seen record inflows to ESG equity funds focused on Europe, North America, emerging markets, specialist regions and equity income.

Property funds saw outflows moderate in July following Freedom Day and fixed income funds saw inflows rise on global growth worries

Elsewhere in the UK funds market, inflows to fixed income funds rose to £696m[2] as falling bond yields, pushed lower by global-growth concerns, attracted buyers (falling yields mean capital gains for investors). Meanwhile, real estate funds continued to suffer outflows (the 34th consecutive month), though the level of outflows slowed sharply as Freedom Day raised hopes of a recovery in demand for commercial property in sectors hit hard during the pandemic.

Edward Glyn, head of global markets at Calastone said: “Active funds have always been a fairly simple bellwether of sentiment – when investors were nervous, active funds bore the brunt of outflows; when they were brimming with confidence they would pile into them. Index funds, by contrast, tended to show much steadier inflows in good times and bad, reflecting the strong position they had secured in monthly savings plans.

ESG funds are proving a real game-changer. Investors seem to view them as a class apart – even after two years of dramatic growth, the trend of inflows is still firmly on an upward path, with only relatively minor wobbles when the wider stock market is down. Most ESG funds are actively managed, so the ESG gold rush is masking what are in fact much more normal trading patterns for ‘traditional’ active equity funds – flows for these funds are still just as driven by sentiment as ever. In the last two years, non-ESG active funds have seen outflows in more than five months in ten.”

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.

[1] The worst month for index funds was June 2020 when investors fled for safety after the dramatic post-crash rebound in stock markets. In that month there was a net outflow of £104m, the only negative figure since 2016.

[2] Up from £586m in June and £606m in May