Investors give thumbs down to equity funds as Omicron bursts on to the scene ______

The arrival of Omicron prompted abrupt sales of equity funds, according to the latest Fund Flow Index from Calastone, the largest global funds network. As governments slapped new restrictions on travel and reimposed mask mandates, investors reacted swiftly, selling £83m of their equity fund holdings on Friday 26th and Monday 29th November. The overall volume of transactions leapt by 60% between Thursday and Monday as investors adjusted their holdings to reflect their first assessment of this latest episode of the pandemic.

Equity funds saw inflows overall in November, but the headline figures disguised record selling for North American and European equity funds among others

Despite the large outflows at the end of the month, equity funds saw inflows totalling a net £528m in November. This is one third of the average for the last twelve months. This is a positive figure of course, but it disguises a growing increase in risk aversion among investors, which is revealed once we look at the individual categories of which funds investors were trading. For example, November was the worst month on Calastone’s record for US and European equity funds, with a net outflow of £395m and £534m respectively. Outflows from UK-focused equity funds reached £464m, the sixth worst month on record and marked the sixth consecutive month of net selling.

Risk aversion saw switching into safe-haven money-market funds

The theme of risk aversion is underlined by a sharp increase in inflows to safe-haven money-market funds. These have suffered outflows in ten of the last twelve months, but in November, investors added £108m – a modest move, but indicative of the change in mood. Meanwhile, rising bond yields (peaking on 24th November, the day before Omicron burst onto the scene) pushed investors to reduce how much they committed to fixed income funds (rising yields mean that bond prices fall). These same rising bond yields are responsible for the risk aversion in equities too.

Record inflows to ESG funds disguised rising risk aversion

The reason that equity funds overall experienced inflows, even though so many categories saw outflows, was due to the incredible and undiminished success of ESG funds, which enjoyed record inflows of £1.5billion. Equity funds with no ESG mandate suffered outflows of £1bn for the second month in a row. Indeed, November was one of the worst months Calastone has seen for non-ESG funds.

It is too soon to judge the impact of the new variant – Calastone expects more volatility in the coming weeks

Edward Glyn, head of global markets at Calastone said:Covid-19 continues to be a key driver of both market sentiment, and fund flows. The spasm at the end of the month that saw a sudden rush for the exits and a spike in trading volumes was a clear reaction to Omicron’s discovery, though the selling was measured, rather than a rout. Meanwhile, the record outflow from European equity funds reflects the vicious fourth wave that was already sweeping through many countries and the imposition of new restrictions, even before Omicron appeared on the scene. Europe’s inflation problem isn’t helping either. For US equities, we suspect the outflow is also linked to the surge in bond yields, to which US equities are very sensitive. All of this adds up to greater risk aversion.

The Omicron story has not yet been written, so it could all end up being a fuss about nothing, or it could lead us all back into lockdown. Until that is clear, volatility will continue to be a key theme.

And yet, above all this, ESG continues to capture investor imagination. It’s clearly cannibalising other types of fund now in the race for new capital. When investors have cash to add, they add it to ESG, and any impulse to sell is felt by other categories.”

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