ISA season sees record inflows for equity funds ______

Equity funds enjoyed their strongest inflows in March on record, according to the latest Fund Flow Index (FFI) from Calastone, the largest global funds network. UK investors committed a net £2.96bn to equity funds surpassing the previous record, set during the post-crash bounce in April 2020, by more than a tenth.

Active funds are on a roll – beating passives for new cash

Active fund managers had the most to celebrate, scooping over three quarters (£2.32bn) of this new cash, enjoying their best month since July 2015. In a marked reversal of the prevailing trend, active funds have now beaten their passive counterparts in the race to attract new capital in four of the last five months. In the run up to November 2020 active funds lost out to passives in 26 months out of 28.

Global funds scooped £2 in every £3 of March inflows

Almost two thirds of March’s new cash flowed into global equity funds – a record £1.84bn. Global funds have easily been the most successful equity category in Calastone’s index in recent years, both in terms of the capital inflow and their score on Calastone’s index. In the last year alone, over 90% of all new cash going into equity funds has been to the global category.

ESG gold rush intensifies

In turn, the big driver in demand for global funds in the last twelve months has been ESG. More than half the net new cash added to global funds has been to those with an ESG mandate in the last year. In March alone, global ESG equity funds garnered record new capital of £1.15bn.

Across the wider ESG equity category, inflows totalled an incredible £1.60bn in March, almost double the previous record set in February, and again beating the inflows to non-ESG equity strategies even though non-ESG equity strategies themselves had a strong month (£1.4bn). The value of buy orders for ESG equity funds was three times larger than the value of sell orders, generating an FFI:ESG Equity of 74.9. The last five months have seen easily more capital flow into ESG funds than in the previous 6 years.

ESG fixed income and ESG mixed asset funds also enjoyed record inflows in March.

UK equities back in favour

Funds focused on UK equities enjoyed their best month since the post-crash bounce in April last year as investors added a net £610m to their holdings. In a startling turnaround, UK-focused funds were the second-most popular geographical category after global. Last month, Calastone’s FFI noted modest inflows to UK-focused funds, breaking an 8-month stint of outflows. The February FFI suggested a rotation into UK equities may have begun. This seems to be confirmed by the March transaction flows.

Elsewhere, European funds missed out on the surge of appetite for equities, but Asia, Australia, North America and emerging markets all did well.

Record turnover as investors switch holdings

Total turnover in funds was also very high in March, soaring to a record £31.1bn, around a quarter higher than the previous record set in March 2020 when global markets were convulsed by the wave of Covid-19 lockdowns sweeping around the world. High turnover indicates more switching between funds. Calastone’s Fund Flow Index scores net inflows relative to turnover. Because the record net inflow was on the back of such a high volume of trading, the FFI:Equities did not break a new record, though at 54.8 it was well above the long run average of 52.0.

Edward Glyn, head of global markets at Calastone said: “Managers of equity funds have enjoyed their best ISA season in years as new capital has flooded in from investors keen to capitalise on the post-Covid economic recovery. What’s more, the tentative first steps to recovering lost cash by active funds have transformed into leaps and bounds after several months of solid inflows.

Going global has been easily the core equity strategy among UK investors over at least the last six years. The benefits of diversification have become even clearer given how exposed the UK stock market was in 2020 to the Covid-19 dividend cuts.

The ‘go-global’ trend has been super-charged of late by the astonishing rise of ESG strategies. The ESG gold rush only intensified in March. Nobody can doubt that ESG is philosophically a force for good. We are mindful, however, that it must live up to the marketing messages and deliver on its investment aims.

For UK equities, the tide seems to have turned now. Bombed out stocks have come back into favour as the economy is poised to rebound on the back of the UK’s stand-out success in vaccinating against the coronavirus. This is driving inflows to UK equities on a scale we have not seen in a year. Part of the story is rotation. The UK is decisively a ‘value’ market and with bond yields on the rise, value stocks are more attractive to investors. We have noticed, by contrast that tech-sector funds saw outflows in March – they are very sensitive to rising bond yields and are missing out on the equity fund-flow boom. These rotation trades are partly why overall transaction volumes are so high at the moment.”