High yields and safe havens prove irresistible to investors as switch from equities to fixed income intensifies______

Edward Glyn, Head of Global Markets

Investors accelerated their flight from equity funds and into fixed income and money markets in June, according to the latest Fund Flow Index from Calastone, the largest global funds network. They withdrew £662m from equity funds during the month, the largest outflow since the market convulsions of September 2022. June was one of the top ten worst months for equity fund outflows on Calastone’s record.

Investors were also net sellers of mixed asset funds and property at the fastest rate since the autumn of last year, withdrawing a net £384m and £79m in June, respectively.

June: investors swapped equities, mixed assets and property for fixed income and money markets

The cash raised found its way straight into fixed income funds, which saw net inflows of £880m and money markets, which enjoyed net inflows of £503m, their second-best month on record after March 2020 when markets seized at the onset of Covid-19. Calastone’s FFI: Money Markets, which compares net flows to total turnover reached a record reading of 69.9 in June, as buying activity outweighed selling by 2.3:1, indicating a very high level of conviction by investors.

Last 12 months: a strong switch away from equities as investors look for safety and yield

June’s figures are part of a pattern that has extended since central banks started raising interest rates. Over the last twelve months, occasional flurries of optimism notwithstanding, investors have pulled £3.65bn from equity funds and pumped £7.29bn into fixed income. They have added another £2.44bn to money market funds.

Edward Glyn, head of global markets at Calastone said: “Fixed income funds and their money market cousins have not looked so attractive since before the global financial crisis. At the same time, recession fears are stalking equity and property markets – investors are nervous. The result is a flight to safety. Money markets currently enable investors to earn an income of 5% or more at very low risk, while fixed income funds, which invest in longer-dated bonds than money market ones, offer the chance to lock into the highest yields in years. They now offer both income today and the prospect of capital gains when the credit cycle turns and market interest rates fall back.”

Global and emerging markets saw inflows, but UK, North America and ESG suffered strong outflows

Equity-fund selling was focused on perennially ill-favoured UK equities which suffered outflows of £612m, the 25th consecutive month of net-selling. Investors were also strong sellers of North American equity funds (net outflow £542m) and equity income funds (£324m), which had their worst month since September 2021.

Global equity funds did, however, continue to attract new capital, along with emerging markets which have enjoyed strong inflows all year.

Meanwhile, ESG funds saw outflows accelerate in June after a very bearish May. Investors pulled a net £369m from the sector, the worst month on record for the sector and only the third to see outflows since the ESG boom began almost four years ago. The selling was focused on North American ESG funds and those investing in the UK.

Technology funds benefited from AI hype

Notably, the small specialist technology sector had its best month since December 2021 with net inflows of £50m. Technology funds had suffered outflows for several months until early 2023 when stock prices for many technology companies, especially in the US and especially those working on AI, began to surge.

Edward Glyn added: “In the equity asset class, investors have increasingly focused their buying on global equity funds in recent years. Inflows of £50bn since 2015 have been funded by sales of UK, European and income funds in particular, as well as newly saved capital.

“Alongside a structural investor preference for global funds, from time-to-time different regions come into favour. Emerging markets funds are having just such a moment. They have enjoyed their best six-month run of inflows on record (£1.6bn) as investors leap on relatively low valuations, on the benefits to emerging markets of a weakening US dollar and of the impending turn in the credit cycle. As part of the emerging market story, China’s economic recovery from zero-Covid may have disappointed everyone so far, but investors are hoping the government will step in with renewed stimulus to spur the economy back to life.”

Edward Glyn, Head of Global Markets

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