Record inflows to equity funds in Q2 2021, though investors are starting to show signs of nervousness ______

Record inflows to equity funds

Equity funds collectively experienced a record quarter of inflows in Q2, according to the latest Fund Flow Index from Calastone, the largest global funds network. Between April and June, investors committed a net £6.2bn of new capital to equity funds of all kinds, easily beating the record set in Q3 of 2015[1]. The first half of 2021 is also a record (£10.1bn inflow).

Over the last twelve months, equity funds have absorbed an astonishing £15.0bn of new cash, smashing the previous twelve-month record set in early 2018 by a fifth. Across all asset classes, the £35.6bn inflow is the strongest in any rolling twelve-month period since late 2018.

June saw a cooling in appetite to add more cash to funds

Inflows in June however were more subdued compared to recent trends. A net £1.1bn was committed to equity funds, half the level seen in the previous four months. This does not mean June was a bad month in the broader context – inflows were still around double the long-run monthly average.

Third-wave fears prompted outflows from UK-focused funds and lower buying elsewhere

The most notable change in June was the resumption in selling of UK-focused equity funds. The rapid rollout of the vaccine programme had spurred a significant reappraisal of UK-focused funds, driving large inflows between February and mid-May, but the emergence of a third wave of infection in the UK first slowed inflows (in May) and then reversed them in June. Net selling of UK-focused funds in June totalled £18m – a small but significant row-back in optimism.

The reduction in appetite for equity funds was not limited to UK-focused funds. Most other categories of equity funds saw smaller inflows in June than the month before, though UK-focused funds were the only category (bar equity income) to see outflows. For example, non-ESG global funds, one of the largest categories, saw inflows drop by a third compared to May. At £532m this was still a good result compared to the longer term average, but was the lowest since February this year and was less than half the April level.

ESG funds stood out

ESG funds stood out, however, with inflows rising month-on-month to £739m. All the net inflows of capital to actively managed funds in June went into the ESG category. Year-to-date ESG funds have accounted for 50% of the net amount of new capital flowing into equity funds of all kinds, a total of £5.0bn.

Across fixed income and mixed asset funds, inflows were also lower in June. For property funds, outflows continued, but at £248m were a little slower than the average of the last few months.

Edward Glyn, head of global markets at Calastone said, “UK savers have salted away an extra £192bn[2] in their bank accounts since the pandemic began. Not much of this enormous cash surplus needs to reach investment funds before it smashes records, which explains why investment funds have had such a strong run of inflows over the last year, especially equities.

“There is certainly some nervousness around now, however. For the medium term, financial markets are weighing up whether the blistering speed of this business cycle means it is already time to look beyond to the inevitable economic cooling. A change in sentiment like this also impacts the relative attractiveness of more value-orientated markets like the UK, which benefit from a bit of inflation. It is not yet clear whether the ‘reflation trade’ has further to run, as the short-term prospects are clouded by the Covid-19 third-wave risks.

“As for ESG funds, even though the inflows remain extremely strong, they seem to be levelling off in recent months, an ISA-driven burst in March notwithstanding. This does not mean the ESG investment boom is over. Not by a long chalk. But exponential growth in inflows can only go on so long. Fund managers will be content if flows can stay at this elevated level for a prolonged period.”

[1] Q3 2015 net inflow, £5.5bn

[2] Source: Bank of England 2021