Equity funds saw net outflow of £1.53bn, their biggest since July 2016
Russia’s invasion of Ukraine prompted the biggest flight from equity funds since the Brexit referendum, according to the latest Fund Flow Index from Calastone, the world’s largest funds network. UK investors withdrew a net £1.53bn of capital from their equity holdings in March, just shy of the record £1.56bn they redeemed following the UK vote to quit the EU.
Active decisions to sell were the main driver of outflows, rather than a buyers’ strike
A sharp increase in sell orders was the main driver of the net outflow of capital, with a reduction in buying making a smaller contribution. The value of sells rose by £963m month-on-month, while buy orders fell by £608m. This indicates active decisions to pull money from the markets, rather than a simple buyers’ strike being the main driver.
Outflows accelerated through most of March
Net outflows accelerated as the month progressed, peaking at £699m between 21st and 25th March, but in the final week of the month they tailed off as Russia appeared to scale back its ambitions in the face of a successful Ukrainian defence, and as the recovery in stock markets calmed fund investors.
Global equity funds saw the biggest outflows, but UK-focused funds saw less selling than usual
Global equity funds bore the brunt of the outflow. Investors sold down a net £992m of their holdings in this category. Almost every geographical category of equity fund saw outflows. Notably, UK-focused equity funds, which have now suffered net outflows for a record 22 consecutive months, saw the value of capital withdrawn fall to its lowest level in seven months.
ESG funds continued to enjoy inflows, though at lower levels
Amazingly, ESG equity funds came away relatively unscathed. They enjoyed inflows in March, even as investors fled from equity funds more generally. ESG equity funds saw inflows of £136m. This was admittedly their lowest reading since the boom in ESG took off just over two years ago (and compares to an average monthly inflow of £798m over the last twelve months) but it was notable for its stark contrast to the sharp outflows from equity funds overall.
Fixed income funds also suffered outflows – their second-worst month since the pandemic began
Fixed income funds also had a bad month. They might normally be considered a safer haven in times of risk for equity markets, but the inflation shock associated with war-fuelled energy prices has compounded inflationary pressures already affecting the whole world. This is making investors wary of fixed income funds. Net outflows in March were £274m, less than in February, but only the second month since the pandemic began that bond funds have suffered a net withdrawal of cash. Real estate funds also suffered net outflows, but mixed asset fund inflows were in line with the long-run average.
Edward Glyn, head of global markets at Calastone commented: “The world’s major stock markets were very volatile in March, but they have mostly regained the losses they sustained when Russia attacked Ukraine on 24th February. This has not been enough to reassure UK fund investors. Global risks are rising – growth prospects have deteriorated, and a recession is now a possibility in many developed countries. Inflation is taking hold, living standards are being squeezed and government budgets are also under pressure. Against this backdrop, it’s easy to see why March saw the largest net outflows from equity funds in almost six years and why bond funds are out of favour too.
“Market timing is a dangerous game, however. The recovery in share prices suggests the redemptions from funds were poorly timed, though the biggest outflows came after stock prices had recovered the worst of their losses.”
On the reduction in outflows from UK-focused equity funds, Glyn added:
“Oil and commodity prices soared in the wake of Russia’s attack on its neighbour and this has benefitted the very large oil and mining companies listed in London. What’s more, the UK stock market has lagged well behind its peers in recent years, so investors looking to take profits from their equity holdings have found better opportunities to do so elsewhere. UK-focused funds still did not escape outflows during the month, however, reflecting continuing investor disenchantment with the asset class.”
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.