UK equities funds saw record outflows of £836m in April, with selling focused on riskier categories
Investors sought out safe havens for their capital in April, according to the latest Fund Flow Index from Calastone, the largest global funds network.
UK-focused equity funds saw record outflows during the month. Investors pulled £836m from the category, just beating the previous record set in January this year.
The outflow from UK-focused funds was broadly based. Two thirds of UK-focused equity funds saw outflows during the period, but those focused on mid-caps and smaller companies featured more prominently on the sell list. Among the most heavily sold twenty funds, seven were in these categories, but none was among the twenty most heavily bought ones. Together these two categories of UK-focused equity funds accounted for two fifths of the net outflow from UK equities overall, a much larger share of fund flows than assets under management. This also explains why actively managed funds bore the brunt of the outflows- almost three quarters of the net total, as small-cap and mid-cap funds are more likely to be actively managed.
Out of £49bn invested in equities funds since January 2015, no net new money has flowed into UK-focused funds.
European, North American, technology and specialist regional funds also saw outflows
The UK was not the only region investors chose to avoid in April. North American equity funds saw their second highest outflows on record (£285m). Those focused on Europe also saw sharply higher redemptions month on month (up £168m). Among funds with a sector focus, technology funds saw their fifth consecutive month of net selling.
Global fund inflows partially offset record selling in March and were dominated by ESG funds
Global funds stood out with £1.58bn of inflows in April. On a standalone basis this looks very strong, but it can reasonably be considered a correction of excessive negativity in March which saw record selling to the tune of £977m. Moreover, two thirds of the April inflow to global funds was devoted to global ESG equity funds, continuing the secular trend of new capital flowing into this burgeoning category(£1.0bn). No month has seen outflows from ESG funds in over three years.
Excluding ESG funds, equity funds overall saw outflows of £245m, the fourth consecutive month of outflows.
Elsewhere, £200m flowed into equity income funds. This was the first month the category has seen inflows for two years. Funds with a global income mandate garnered most of new capital flowing into the equity income category, but a significant portion also flowed into UK-focused equity income funds.
Inflows to fixed income funds were focused on lower-risk categories – short-dated and inflation-linked bonds
Among other asset classes, bond funds enjoyed inflows of £610m. Looking below the surface, Calastone’s figures show that the preference for lower risk options was evident in fixed income funds too. Funds focused on short-dated bonds, which are the least volatile and are considered a safe place to park capital in times of great uncertainty saw inflows. Those that invest in inflation-linked bonds were also popular. Those focused on high yielding bonds however, which are a riskier category, saw almost no net new money. Moreover, the majority of funds targeting high yield bonds saw outflows.
Edward Glyn, head of global markets at Calastone said: “Investors are wary. Everywhere we look, risk-off trades are dominating the picture.
“Outflows from UK-focused funds make sense at present given the weak economic outlook, but we were surprised at just how negative sentiment was. The flow of news on the UK economy has been relentlessly bad over the last few weeks as investors have absorbed the limited and heavily criticised set of measures announced by the Chancellor to protect households from soaring inflation, while tax increases and an economic slowdown will only add to the pressure on household finances. This helps explain why outflows were so large. It is very telling that funds focused on smaller and mid-cap companies have borne the brunt of the selling – these companies are much more exposed to an economic downturn. A noticeable switch into UK-focused funds with an income focus is the flipside to this trend.
“Selling of technology funds and US equities are two sides of the same coin, given the dominance of the global technology giants on the US stock market – rising bond yields are a killer for highly valued tech companies. The sharp falls in tech share prices in recent months are making investors increasingly wary. Meanwhile outflows from European equities reflect the expectation of a European recession and persistent inflation in the region as war rages on its eastern borders.
“Against this backdrop, income funds offer something of a safe haven – both those with a global and those with a UK focus – so the patterns of trading suggest there is a switch taking place from growth to income. That makes sense in the current climate.
“The inflows to global funds might seem strange, but taken across March and April together, these funds have also seen outflows (as have UK, European and technology funds), and where there is interest in global funds, it has been heavily focused on ESG, which is well suited to a global approach and which is proving resilient even in times of significant investor nerves. Having only recently begun to join the mainstream, ESG funds are catching up on assets under management so they can enjoy inflows at the expense of more established categories in times of investor nerves.”
 Small cap UK funds, for example are just 9% of UK-focused funds under management, according to IA data (mid-cap figures not available)
 Largest ever was November 2020, -£395m
 Last time was May 2020
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.