War in the Middle East deterred investors in June, according to the latest Fund Flow Index from Calastone, the largest global funds network, but did not cause panic. Equity funds saw outflows of £98m during the month (inflow of £525m in May), while bond funds saw inflows fall to £195m (£328m in May) and safe-haven money markets saw inflows rise to £218m (£85m in May).
The outflow from equity funds was not driven by an increase in selling: the value of sell orders actually fell during the month, down by 2.5% to £11.4bn. It was instead caused by a buyers’ strike: the value of buy orders fell 7.5% to £11.3bn, their lowest level since September 2023.
Edward Glyn, head of global markets at Calastone said: “June was characterised by caution, not fear. A net outflow from equity funds as an asset class is relatively rare as we have a structural bias towards adding to our savings – just one month in five over the last 10 years has ever seen investors withdraw capital – so any outflow is noteworthy. But it was modest in June – a £98m withdrawal is vanishingly small in the context of £22.7bn of total transactions.
On the one hand investors were naturally worried by the outbreak of a war with unpredictable consequences and on the other they were reassured by global stock indices being relatively unmoved. They dropped a little at first before ending June ahead, while bond markets rallied throughout the month.
Investors weighed the uncertainty, but did not panic.”
UK-focused and global funds fared worst. June’s £594m net outflow from funds investing in UK equities is part of a long-term structural trend of monthly selling by UK investors. The £365m outflow from global equity funds is much more unusual – the first time net selling has occurred since the Liz Truss’ mini-budget in September 2022, and only the fifth month on Calastone’s more than ten-year record.
By contrast, European equity funds benefited from £301m of inflows in June, while North American ones saw net buying of £306m. North American inflows were up month-on-month (May £115m) but down sharply from March and April which between them saw inflows of £3.3bn.
Special Focus on Active v Passive Funds:
There is seemingly no stopping the rise of passive funds. Since the beginning of 2015, when Calastone’s records begin, passive equity funds have absorbed £86.3bn of investor capital compared to just £20.6bn for actively managed equities.
More recently the difference is even starker. Over the last two years investors have added £43.6bn to passive funds but have withdrawn £9.2bn from active ones. Even in rare months when investors have added to active funds, passive funds have typically seen inflows £1bn to £3bn bigger.
This continued in June. Despite outflows from equity funds overall, investors committed £1.3bn of new capital to passive funds, focusing their selling on active ones and duly withdrawing £1.4bn.
Even in unloved UK equities, flows have been positive to passive funds over the last one, three and five years, with only occasional months of outflow. Active UK equity funds have shed £51.8bn since January 2015, compared to £7.3bn of inflows to passive ones.
Actively managed global equity funds have stood out in recent years, being one of the few sectors to beat passive funds for new capital. But this may be changing. Year-to-date, passive fund inflows are £2.3bn ahead.
Edward Glyn said: “Active funds are not just losing the fight for new capital, they are also losing their ability to hold onto their existing funds. In the last three years, a period of strong inflows to equity funds overall, active funds have seen outflows in eight out of every twelve months, compared to just one in every twelve for passive funds.
The biggest advantage passive funds have over active ones is low cost. Squeezing cost out of the investment process is hugely value enhancing for investors. It’s also central to our mission at Calastone. Our technology eliminates the cumbersome manual processes that used to accompany fund transactions and that means lower costs for fund managers and investors alike.”
