Investors dismiss Omicron risk in December, pushing full-year equity inflows to record levels for 2021 ______

Hopes that Omicron’s impact will be less severe than past waves swept a flurry of optimism through UK investors in December. Savers added £1.0bn in new cash to their equity holdings during the month, taking the 2021 net inflow to a record £14.2bn, according to the latest Fund Flow Index from Calastone, the largest global funds network. In 2015, the last high point, inflows reach £11.6bn.

As Omicron fears subsided, investors became much more enthusiastic about the prospects for equities. In December, net inflows doubled compared to November and, at £1.0bn, reached their highest level since August. The biggest change in sentiment was evident in European and North American funds, where heavy selling in October and November was replaced by modest inflows.

UK funds suffer worse than any other category

There was also a marked reduction in outflows from equity funds focused on the UK market, almost halving between October and December[1], though the £326m outflow from this category was still among the worst months on record for the unloved category. December was the seventh consecutive month to see outflows. UK-focused funds shed £1.1bn for the whole of 2021, the worst for any geographical category. Equity income funds, which are heavily allocated to UK equities, saw outflows of £4.3bn, their sixth consecutive year to shed capital. European equity funds also saw outflows last year, but all other geographies saw inflows.

Global fund and emerging markets were the big winners in 2021

In December, inflows to global funds were £1.3bn, seven times larger than the next largest inflow (emerging markets +£191m). The popularity of global funds meant they enjoyed a record year with £13.4bn of inflows, 76% more than their 2020 previous record. £6 in every £10 flowing into global funds was specifically focused on global ESG investing.

Investors also plumped for emerging market funds adding record new cash of £2.2bn, mainly in the second half of the year. Indeed, inflows to emerging market funds were so strong last year that they equalled the previous five years combined.

Fixed income funds saw highest inflows in five years

Fixed income funds also had a good year, garnering £6.6bn in new capital, second only to 2016. They tended to do best in the worst months for Covid news – January (UK peak deaths), April (Delta) and December (Omicron). Months when inflation fears predominated (July, October, November) saw inflows dwindle. ESG investing is beginning to become a meaningful driver of fixed income funds too. One quarter of inflows last year were into ESG fixed income.

Among other asset classes, property funds suffered their third consecutive year of outflows (-£2.1bn) and the relatively stable mixed asset category saw inflows in line with the long-run average. It was the worst year on record for absolute return funds at -$5.1bn.

Edward Glyn, head of global markets at Calastone said: “Having paused in late November to consider the possible impact of the Omicron wave of Covid 19, investors have so far cautiously judged that its impact will be significantly less severe in the UK and abroad. That’s driven new cash into equity funds, doubling month on month. Interest in emerging market funds provides further evidence that there is a greater appetite for risk.

Opinion seems to be rather split, however, because December also saw the highest inflows to bond funds since the Delta wave hit in April. This suggests investors are less worried about interest rates rising so quickly, which would push down bond prices. On this they may be disappointed, however, as inflation soars both here and around the world.”

There’s no respite for unloved UK equities. Economic wobbles in the fourth quarter, political instability, rising interest rates, Brexit chaos, and renewed Covid restrictions in parts of the country mean investors prefer to look elsewhere. Outflows have slowed a little, but we do not expect to see UK-focused flows shoot to the top of the rankings in the near future.”

[1] UK-focused equity funds, net flow: October -£607m; November -£467m; December -£326m

Methodology

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.