Edward Glyn, Head of Global Markets

UK investors are piling into equity funds at the fastest rate in almost three years, according to the latest Fund Flow Index from Calastone, the largest global funds network. They added £2.66bn to their holdings in February, making it the best month for inflows since May 2021 – and the fourth best month on Calastone’s nine-year record.

Equity fund inflows soared to highest level in three years in February

A new trend is bedding in – February marks the fourth consecutive month of inflows, following a punishing eighteen months that saw £8.60bn flood out of equity funds. Since November, each month has seen ever greater inflows as investors have increasingly bought into a strong stock-market rally, taking the four-month tally to £6.31bn.

Inflows are highly concentrated – with North America the main beneficiary

The inflows are very selective and very concentrated, however. £2.54bn surged into North American equity funds, breaking records for the third consecutive month. Of this, three quarters (£1.88bn) was committed to American ESG funds in particular. Investors also continued to add to European equities to the tune of £363m, and in this case all the new cash went into ESG funds – non-ESG European funds saw a small outflow. A mixed picture for ESG funds in other geographies meant an inflow of £1.54bn for ESG funds overall in February.

ESG funds enjoyed a second strong month – driven by US markets

The renewed interest in ESG funds after months of outflows in 2023 made February’s inflows the fourth best month on record after January marked the all-time high. Global equity funds also saw strong buying in February though this was focused on funds without an ESG label.

UK and Asia-Pacific funds remain out of favour

Meanwhile, Asia-Pacific funds had their third-worst month on record, shedding £229m, while UK-focused equity funds continued their long run of outflows. Investors withdrew £633m, in line with the average from the last couple of years.

Fixed income funds saw steady buying as market yields rose, but money market flows are drying up

Among other asset classes, money market funds saw inflows of £78m, slightly up on January but well below the £400m monthly average during 2023. During 2023, money market funds were strongly in demand as investors sought a safe, high-yielding home for their cash.

By contrast, fixed income funds had their best month since June 2023, attracting £329m of new cash, though this merely puts the month in line with the long-run average for the category. Mixed asset funds remain out of favour, while property funds continue to suffer structural outflows as the property investment industry turns away from the open-ended wrapper.

Edward Glyn, head of global markets at Calastone said: “Risk is back on with a vengeance. Investors are going cold on safe havens and jumping back into equities feet first. The US stock market has soared by a fifth since late October, driving accelerating fund inflows ever since. The rally has been driven by technology stocks in particular. These are heavily represented in ESG funds which may help explain why we are seeing such a surge of interest in US funds in this category. A rising tide is not lifting all boats, however. The UK stock market has notched a touch higher over the same period, but nothing can persuade UK investors to add capital to their home market, despite very low comparative valuations. Meanwhile, Asia-Pacific remains stuck in China’s doom loop.

“The equity bull market seems to have ignored developments in the bond markets. Fears both that inflation may prove too sticky and that spendthrift governments simply haven’t got the will to curb their deficits have pushed yields back up in recent weeks – and bond prices therefore down. These higher yields are bad for equity valuations but they haven’t touched the sides of the bull run. For their part, bond investors are adding modestly to their fund holdings – locking into today’s higher yields and hoping for capital gains if and when the market rallies.”

Edward Glyn, Head of Global Markets

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