Confidence and cash – betting on the global recovery______

Calastone Global Report


Global Funds Industry – Leaping Ahead

Transaction volumes soar

Net fund flows – confidence and cash

Spotlight – the ESG boom

Active funds – benefiting from ESG

Cross-border flows – internationalisation

The global funds industry – leaping ahead

The global mutual funds industry has long shrugged off the effects of the pandemic, even though infections continue, and despite the world economy facing the hangover of battered government finances, unprecedented supply-chain disruption and sharp increases in inflation.

Assets under management are already over a quarter higher than their pre-pandemic peak

The International Investment Funds Association (IIFA) keeps track of the value of open-ended funds under management around the world[1]. It shows the industry had already completely recovered from the Q1 2020 pandemic-induced low point by the third quarter of 2020. AUM has continued to climb since. By the end of the third quarter of 2021 open-ended funds were worth $68.3 trillion[2], exactly a quarter more than their pre-pandemic peak at the end of 2019. More than nine tenths of this capital is in the hands of retail investors, with the rest owned by institutions.

Of the $13.3 trillion increase in AUM since December 2019, most was due to the sharp rise in asset prices, itself driven by huge volumes of fiscal and monetary stimulus from governments and central banks around the world. Equity prices, for example, are currently over a third higher in the last two years as measured by the MSCI World index, shrugging off the one third decline that briefly hit the market at the outset of the pandemic. Nevertheless, just over a third of the increase was down to fund flows, as household savings rates reached record levels. Savings levels always rise during recessions, but the pandemic super-charged this effect given national lockdowns made it impossible to spend on many goods and services and because policymakers in rich countries took extraordinary measures to protect jobs and incomes.

AUM growth varies widely in different fund markets

Over the last five years, the value of open-ended funds under management has grown by two thirds, according to the IIFA[3]. Chinese savers are propelling the fastest growth, up by 159%. AUM in the US rose ahead of the global average too, up by three quarters, reflecting the high exposure of US investors to their home market as well as inflows – the S&P 500 rose 133% over the same period. Across Europe, growth was slightly behind the world average, up by almost three fifths. As a major centre for mutual fund administration, Ireland stood out, doubling AUM to $4.4 trillion, in large part due to the migration of capital away from the UK as it left the European Union.

Asset distribution is very uneven

Thanks to a combination of a large, wealthy population and very high asset prices, US and Canadian investors own half the world’s funds by value, while those in Europe and the UK hold a third. Almost all the balance is in the hands of investors in Asia-Pacific. The African funds industry is concentrated in South Africa, as the continent’s most developed economy, but it is small in the global context, being similar in size to Norway’s.

Number of funds in issue has proliferated with the fastest growth in China

Investors can choose from an astonishing 129,215 funds. This number has increased by one sixth in the last five years, driven mainly by emerging markets. In mature markets, numbers are relatively stable – the number of funds in the US remains roughly flat and has risen by one tenth in the UK and one tenth in Europe respectively. In China, by contrast, roughly one thousand new funds are being launched each year – there are ten times as many funds in operation today than there were a decade ago.

Equities naturally make up the largest asset class, accounting for 47% of the total AUM in Q2 this year, with fixed income comprising another fifth. Mixed assets and money markets each account for one eighth (12% each) and real estate 2%, while the rest is a mixture of other minor categories.

[1] IIFA worldwide open-ended funds, excludes funds of funds, includes ETFs

[2] $9.1bn of this total comprises ETFs

[3] Q2 2016 to Q2 2021

Transaction volumes soar

Investors are trading much more actively

Calastone’s network continues to expand around the world, both by encompassing more territories and gaining additional market share in the markets where we already operate. Some of the growth in flows across our network therefore reflects our own development. Equally, some of the increase is a function of higher asset values – this is a wealth effect as a decision to switch say 5% of your holding means a larger value is transacted in order to change the asset allocation than it was when prices were lower. The increased investor response to the rapidly changing market and economic conditions has also played a role – – both convulsions of risk aversion and strong bull markets drive volumes Finally, there is the net addition of new capital to long-term savings products thanks to the large volume of savings accumulated since March 2020, as the IIFA data and our own show.

2021 saw dramatic increases in the volume of fund orders

In 2019 Calastone processed $989bn of buy and sell orders from investors around the world. That rose sharply to $1.31 trillion in 2020 and has soared even further this year, reaching $1.84 trillion, up 41% year-on-year. Indeed, by the end of September 2021, the network had already seen more trading volume than the whole of 2020.

Among the territories where Calastone has a very large market presence, the fastest growth was in Australia, where volumes jumped by almost half year-on-year (+47%). They were up by over two fifths in the UK (+42%) and over a third in Singapore (+36%). In Europe (ex UK), volumes jumped by over a quarter (+27%), but in Hong Kong and Taiwan the increase was only a fifth (+22% and +20% respectively).

Equity fund trading volumes dominate

Volumes of equity fund transactions have risen by a third in 2021 and comprise the lion’s share of the total value we process (35%). But even though equity funds are the largest category by assets under management, but they are not the most actively traded once we take their size into account.

Fixed income fund volumes rose much more slowly than other asset classes this year (+14%), having jumped ahead in 2020. In 2020, the onset of the pandemic prompted a dramatic crash in the bond markets and threatened a renewed credit crunch until central banks intervened with their huge expansion of quantitative easing. After this point of crisis had passed, global corporates issued enormous volumes of new bonds to ensure they had the financial flexibility to see them through the pandemic. All this contributed to higher trading volumes. The slower growth in 2021 reflects the high base set in 2020.

Net fund flows – Confidence and cash

Soaring household savings ratios have driven fund inflows during the pandemic

OECD data shows that the savings ratio in member countries jumped dramatically in 2020, in many cases to record levels. The EU average soared to 12.3%, up six percentage points year-on-year. In the UK it leapt more than nine percentage points to a record 7.5% (having been negative pre-Covid), while Australians salted away a seventh of their disposable income.. The flipside of such a huge increase in savings is, of course, the economic contraction that took place in 2020 – saving sucks demand out of the economy. Savings ratios will be returning to more normal levels now, and economic growth has therefore returned, but a lot of this additional capital has found its way into open-ended funds.

Fund managers naturally value net inflows highly. They signify successful product development, marketing campaigns, reputation and brand equity and usually mean that investors approve of the fund’s performance. Crucially, of course, more AUM means higher fees, and while rising markets can offset outflows, asset managers would rather AUM grew by both inflows and higher market values.

Inflows jumped 140% in 2021

Asset managers have enjoyed both in spades in the last two years. 2020 had a shaky start. In the first quarter the onset of global lockdowns prompted outflows of $9.7bn, driven by flight from fixed income funds in particular, but also from equities and real estate too (mixed assets were flat and money markets strongly positive). Over the rest of the year, however, investors poured $72.3bn into funds as equity and bond markets responded so positively to coordinated policy stimulus around the world, leaving the net investment at $62.6bn, up by a fifth compared to 2019.

In 2021, inflows have soared even further – reaching $150.5bn across all asset classes. Net inflows were therefore 140% higher, on trading volumes up 41%. Equity funds and mixed assets accounted for two thirds of the $88bn increase in overall net inflows.

Where are investors putting their cash?

Equity funds on our network saw their inflows concentrated in the first half of the year, peaking at $8.0bn in March. They enjoyed average monthly inflows of $5.5bn between January and July, but this tailed off markedly thereafter. By October, the net inflow had fallen to just $863m, the lowest level in more than a year. The slowdown was driven by lower buying activity, not by increased selling, indicating that this was not a wholesale reappraisal of equities, but rather a reluctance to commit new capital to this riskier asset class at a time of high prices and rising concerns over inflation. At the end of the year, however, optimism returned, as it became clear that the newly emergent Omicron variant was unlikely to cause the same disruption as previous mutations. Inflows jumped back to $4.2bn in December, in line with the full-year average.

Inflows to fixed income funds also slowed as the year progressed and we began to see renewed interest in safe-haven money market vehicles. In November, bond fund inflows of $731m were just a third of the January to October monthly average. The surge in inflation was particularly negative for bond funds because the associated rise in bond yields puts downward pressure on the bond prices. By December, there had also been a marked reversal, recovering to $2.2bn. This seems to indicate a split opinion among investors. Some have dismissed Omicron and bought equity funds. Others have judged that Omicron is bad for global growth and therefore favours fixed income assets. This suggests they have, temporarily at least, put inflation fears on the back burner.

Mixed asset funds saw fairly stable inflows during the year, reflecting their diversified nature.

Investors tended to show similar patterns with equity funds

The trends in different parts of the world were similar, though investors in some places reacted more strongly than others. In Europe, for example investors began to withdraw cash from equity funds in September, to be followed in October by those in the UK, Taiwan and Hong Kong. In Australia and Singapore, by contrast, investors dramatically slowed what they added to funds from the very high levels we saw earlier in the year, but they did not tip over into outright withdrawals. Inflows to equity funds were higher once again almost everywhere by the end of the year.

But there were diverging views on real estate

Real estate shows more divergence. Investors in Europe and the UK are bearish, continuously pulling capital out of the sector, but those in Australia, for example, remain positive. This certainly reflects the different experience of the pandemic, as the real estate industry is facing bigger adjustments in tenant demand in those places that have endured the longest and most severe lockdowns.

A look at flows in smaller company funds reveals how risk aversion has changed

A look at equity funds investing in smaller companies helps draw out this theme of rising risk aversion. Smaller companies tend to be higher growth and higher risk, so their valuations are sensitive to rising interest rates and weaker economic conditions. Between August and October, as the US 10-year bond yield steadily rose from 1.2% to 1.6%, net inflows to equity funds of all kinds fell by 78%, but they dropped noticeably more for smaller company funds, down 86%.

Pessimism began in Europe. Investors here had turned enthusiastic buyers of smaller companies in early 2021 as the vaccine rollout programme got under way around the developed world, raising hopes of an escape from the pandemic. But almost immediately bond yields began to surge and a new threat emerged in the form of the Delta variant. By May Europeans were net sellers of smaller companies.

In the UK, investors were strong buyers of smaller companies until June, but then their optimism also evaporated, and inflows fell to a trickle. A short-lived bond-yield rally in July briefly spurred renewed interest among UK and Australian investors, but the effect was only temporary. As yields began to rise again from mid-August, a couple of weeks later than in the US, UK and Australian savers trimmed back their appetite for these riskier smaller-company funds. By October, for example, UK investors had curbed their inflows to just one tenth of the average January to April level. The drop was less pronounced in Australia. Across other parts of Asia investors have tended to be more negative all year on smaller companies, but they too are responded more aggressively at times of rising yields.

Appetite for smaller companies recovered modestly by the end of 2021, but inflows only recovered to half their average of earlier in the year, rebounding much less robustly in the last two months than inflows to equities overall.

Technology funds fell out of favour as 2021 progressed

Technology funds are also falling out of fashion. As long duration assets, they have benefited from rock-bottom interest rates and huge liquidity in recent years. But, like smaller companies, they too are vulnerable to higher bond yields. June to September saw net outflows for four consecutive months (the longest run in the three years we have been tracking figures). Between October and November, no net new cash flowed into tech funds. Investors worldwide turned more negative on this category in tandem. December was more positive, driven by buying among Asian investors.

Value funds had a strong year – reflecting their lower risk profile

By contrast, fears of rising inflation drove a clear reappraisal of funds with a value strategy, rather than aiming solely for growth. Value funds look for under-priced stocks, often cash generative and with a high yield, but which may have less exciting growth prospects. These usually include utilities, financials and energy companies. The last decade has strongly favoured growth companies, as evidenced by the tech boom. Rising rates are bad for the share prices of these companies but have a much smaller impact on ‘value’ stocks.

Investors on our network were consistent net sellers of value strategies [1] until the end of 2020. But since January 2021 they have returned all the capital they had taken out in the previous two years, and  added a third more[2]. The switch is much more apparent among UK and European investors than it is in Asia, while Australians are somewhere in between.

[1] We have measured flows on equity funds that explicitly reference the word ‘value’ in the fund name

Spotlight – The ESG boom

ESG strategies are the hands-down winners in the fund flow race at present. ESG equity funds on our network gathered an incredible $32.1bn in new capital in 2021, equivalent to $3 in every $5 of new cash committed to equity funds of all kinds. This compares to $10.8bn in 2020 and just $309m in 2019. Some of this is about supply. Asset managers have devoted a huge marketing drive to ESG funds over the last two years and that has certainly driven awareness and uptake. Of course, it also reflects the huge and growing demand from consumers who want their investments to align with their values. Most funds consider all three of the ESG pillars – environment, social issues and good governance. Clearly environmental concerns are front of mind for investors, however, especially as the climate emergency has come to dominate the news agenda on a daily basis. Indeed, some funds focus exclusively on ecologically friendly investing – these accounted for about one eighth of the ESG inflows in 2021.

Trading activity in ESG funds is dominated by buy orders. In 2021, for every $1 of selling activity, investors bought $1.69 of ESG equity funds, generating a Fund Flow Index score of 62.8 (a reading of 50 means buys equal sells). This compares to a much more balanced 52.0 for equity funds without an explicit ESG mandate.

UK and European investors are ahead of those elsewhere

Investors in the UK and Europe are leading the charge. They more than doubled the new capital they committed to ESG funds in 2021 compared to 2020, and have increased it ten-fold compared to 2019. Australian investors have been much slower to adopt ESG. In fact 2021 is the first year we have seen inflows into the category at all, suggesting they are about three years behind their northern hemisphere peers. The $2.1bn net Australian inflow to ESG equity funds in 2021 was just than one sixth of the net new cash they added to equity funds of all kinds, while in the UK it was almost four fifths. In Europe, non-ESG strategies saw outflows. Investors in the rest of Asia are more in step with Australia than the UK and Europe. In Hong Kong, for example, inflows to ESG turned positive for the first time in 2021 and were less than a third of the total net inflow to equity funds. In Taiwan flows turned positive in 2020 and grew again in 2021, while in Singapore, the net inflow almost tripled in 2021 year-on-year and contributed two fifths of the total net inflow to equities.

The active  v passive debate

Active funds are benefiting from the ESG gold rush

ESG funds tend to be actively managed, as asset managers are still wrestling with how to define the universe of potential stocks that meet their ESG criteria. Some managers have invested heavily in in-house screening, while others are relying on external rating agencies. All are alive to the potential for accusations of greenwashing to undermine their efforts. This helps explain why active management is winning the race for ESG capital. Until there is a clearer industry standard on what ESG means and until the companies funds invest into have fully developed robust, defensible policies across environmental, social and governance issues that they can demonstrate they are implementing, asset managers are going to want to continue to select their investments actively.

The figures are quite startling. In 2019, index equity funds garnered $10.0bn in net new cash across our network, while active funds shed $11.2bn. In 2020 things began to improve for the active industry, with net inflows of $6.5bn, just under half the level of index funds. But in 2021 active funds saw inflows of $40.4bn, compared to just $12.5bn for index funds. Almost two thirds (64%) of the net new capital to active funds in 2021 was supplied by ESG strategies. By value about half of this ESG cash went into active global ESG equity funds. There are some index ESG funds, and inflows are growing, but they are relatively small.

Of the remaining $14.7bn of active cash, ‘traditional’ (i.e. non-ESG) global equity funds were the main winners on our network in 2021 (especially thanks to UK and European investors), followed by Asia-Pacific (principally from Singapore-based investors), Australian funds targeting the domestic market, and emerging markets.

Active funds benefitted in 2021 from concerns over stock valuations

A second factor lies behind the rise in active funds. Even if we strip out the ESG element, active funds enjoyed inflows around 2.5x greater than passives in 2021[1], a very unusual pattern after several years of index funds beating active ones in the race for new capital. This relates to concerns about stock valuations. In a falling market, active funds often outperform passive ones. With global benchmarks now heavily weighted to very large, very expensive US tech companies whose valuations are vulnerable to rising interest rates, investors seem to be concluding that tracking the benchmark is riskier than allocating cash to active fund managers. We are not seeing a wholesale switch taking place, but there has been a distinct shift in emphasis.

Active funds are traded far more frequently than index funds

We also note that active funds are traded much more than index trackers. Turnover in active equity funds reached $516bn in 2021, compared to just $120bn for their passive counterparts. This means that our fund flow index, which relates net flows to total turnover was stronger in 2021 for index funds than for active ones – is at 55.2 v 53.9 respectively. It signifies that passive funds tend to show much steadier trading than active ones, which are more influenced by changing market conditions. Investors therefore engage much more actively with their active holdings.

[1] Active equity (ex ESG) net inflow 2021 $14.7bn; Passive equity (ex ESG) net inflow 2021 $6.0bn

Internationalisation of the funds industry

Cross border flows have grown much faster than domestic ones

Cross-border flows have risen more quickly than overall trading volumes in 2021. The value of trades directed across our network to a foreign jurisdiction has jumped 46% to $907bn, compared to an increase of 36% for domestic flows. Half of total volume now crosses a border.

The UK and Australia have very large domestic asset management industries, so most of the fund flows we see stay within those borders. This is almost exclusively so in Australia’s case, but in the UK’s case, a large proportion (48%) of orders by value are executed in the fund administration centres of Luxembourg and Ireland. This has increased from a little over 41% in 2019 and 2020 which reflects the end of the UK transition period as it exited the European Union. European investor trades are largely settled in the UK, Luxembourg and Ireland too. Half the capital from Hong Kong heads offshore, with an even greater proportion doing so in Taiwan and Singapore. Our chart paints a vivid picture of the huge volumes of flows that pass across network, connecting investors and asset managers all round the world.


By Julien Hammerson, CEO of Calastone

There was no master plan when the foundation stones of the mutual fund industry were laid around a century ago, at the time the Massachusetts Investment Trust was launched in 1924. The continuous creation and deletion of units in open-ended funds as investors add new cash or withdraw it has huge advantages for investors, ensuring that unit values always reflect NAV, but it creates enormous administrative complexity and a headache for fund managers trying to handle ever changing levels of liquidity.

The whole system has grown through evolution. In the beginning, fund managers distributed direct to investors, often via advertisements with postal subscription forms, but as the industry grew, intermediaries proliferated, offering more choice and more convenient ways to transact. The whole fund administration infrastructure includes custodians, depositaries as well as fund accountants. Incredibly, for a multi-trillion-dollar industry, there remains a significant layer of manual processing and friction. This has only become more complicated as cross-border flows grow rapidly.

That evolution has ossified practices that should be obsolete but which remain a cost on the system, and therefore on investors’ returns. The laws of compounding are both wonderful and terrible, for they ensure that these costs magnify over a person’s lifetime and take a large bite out of their savings.

It is our vision to change all that. We are working with the industry to introduce new levels of efficiency and to address these expensive and unnecessary frictional costs. Asset managers are facing fee compression like never before, so the more we can help simplify the system, the better able they are to protect their margins while still allowing reduced costs to be passed on to investors. It’s a win for savers and a win for asset managers too.

Our figures show how dramatically fund flows are growing and just how complex investors’ needs are, with volumes increasingly crossing borders. Our role is to ensure that asset managers, platforms and investors can all interact whenever they need to, in whatever size at minimum cost. We are helping transform the industry and make it better fit the needs of the modern investor.

A word about methodology

We have analysed tens of millions of buy and sell orders from 2019 to 2021, tracking investor cash as it flows into and out of investment funds. 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, our research tracks the impact of hundreds of millions of investor decisions each month.

We have not adjusted our figures for our market share. This varies widely from one country to another, but is over 80% in some territories. Any figures that appear in this report therefore only refer to volumes that pass over our own network. With such precise and granular data, we are nevertheless confident that the picture we are painting is representative of wider market trends.

All figures refer to orders where they were placed, not where they were executed. Some markets like Australia see very little cash flow offshore. Others, like Taiwan, see almost all of it settled elsewhere. In the UK, about 15% of transactions by value takes place in funds domiciled offshore.

All the figures in this report have been converted to US dollars, with the exchange rate calculated for each individual trade on the day it was settled. This ‘real-time’ conversion means there are no distortions introduced, for example, by using average exchange rates for any given period.


Our Fund Flow Index (FFI) is a ready reckoner for comparing the popularity of different types of fund with investors. It compares net fund flows to total trading activity so that a small value of buying does not score highly in a big, actively traded fund category, but is rated as significant in a smaller one. A neutral score of 50 means the value of buys equals the value of sells. A reading of 75, for example, means the value of buys is three times greater than the value of sells. The FFI is also useful for comparing fund flows from investors in countries with small populations with those with large ones, or in territories where Calasatone has a dominant market presence v those where we are smaller.

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