Surging inflation and the outbreak of war in Europe prompt sharp shift in fund flows______

Edward Glyn, Head of Global Markets

Surging inflation and the outbreak of war in Europe took their toll on investor sentiment in February according to the latest Fund Flow Index (FFI) from Calastone, the largest global funds network.

Equity funds saw a surge of outflows following Russia’s invasion of Ukraine, leaving February as the second-worst month for equity funds since July 2020

Equity funds suffered their second-worst month since July 2020. Inflows fell to just £42m. This was 96% lower than the average monthly inflow over the previous twelve months and marked a 79% fall since January 2022. Moreover, the picture changed dramatically as Russia invaded Ukraine. Funds enjoyed inflows of £646m up until 23rd February 2022, but as war broke out, investors pulled out capital to the tune of a net £604m in the final three trading days of the month. Funds investing in North America, the UK and Europe were hardest hit, but every geographical category of equity fund saw outflows in those three days.

Post-invasion outflows were driven by a sharp drop in buyers and only a modest increase in sellers – suggesting caution rather than a rout

The outflow from equities funds in the final days of the month was driven more by a dearth of buyers than a flood of new sellers. The value of buy orders fell by almost a quarter (-22%) in the last three days compared to the average earlier in the month, while the value of sell orders increased by just under a tenth (+9%). Since the net outflow is the difference between the two, Calastone’s data shows that increased buyer caution was a more significant driver than intensified seller fear.

Across the whole month, active funds focused on UK equities were hit hardest of all, shedding a record £830m. There were also significant outflows from active emerging-market and Asia-Pacific equity funds. ESG funds continued to beat the rest of the pack. Investors added a net £641m to ESG equity strategies, but sold down £598m of non-ESG funds.[1]

Fixed income funds suffered the brunt of inflation fears, with outflows accelerating on war news – again a dearth of buyers was more to blame than a surge in selling

Investor caution was even more evident in fixed-income funds, which saw a month of outflows for the first time since March 2020, when the onset of the pandemic briefly threatened a major credit crunch. Investors sold a net £517m of their holdings during the month. Indeed, February 2022 was only the second month in three years where bond funds suffered outright outflows. In common with equities, outflows were most significant in the final three trading days, as investors sold down a net £204m of their holdings. Nevertheless, the outflows spanned the whole month, suggesting that rising inflation, the big story for fixed-income investors, was increasingly harming sentiment. The FFI: Fixed Income fell to 45.1, its second worst reading on record (a value of 50 means buys equal sells)

Fixed income net outflows were also driven by a sharp drop in buying activity rather than a sudden jump in selling. In fact, selling activity was broadly stable through the month, but buying activity dropped by over a third in the final days.

Among other asset classes, property funds saw sharply higher net outflows of £148m, the worst reading since June 2021, while mixed asset funds saw inflows fall to their second lowest level in more than a year.

Across all asset classes, net fund inflows fell to just £164m, the worst reading since March 2020.

Edward Glyn, head of global markets at Calastone said: “Investors have a lot to worry them at present. Stock markets have certainly fallen since the Russian army invaded Ukraine, but the falls have not indicated a rout. This is reflected in equity fund flows – buyers have gone on strike, rather than sellers going hell-for-leather, suggesting that caution is the name of the game, rather than a rush for the exits. Buyers have simply opted to sit it out on the side-lines for the time being.

The war is almost certainly going to exacerbate inflation at a time when prices are already rising very rapidly indeed. Higher inflation has been bad for bond markets in recent months, and indeed yields climbed through most of February (yields move opposite to prices). This certainly contributed to outflows during the month. Since the Russian army invasion, bond yields have fallen (pushing up bond prices) as investors increasingly fear the damage the war will do to the global economic recovery. This should have driven inflows to fixed income. But despite this fillip for the bond markets, buyers of bond funds stayed away, preferring to sit out the volatile conditions in global markets.

The especially large hit suffered by UK funds is partly because UK equity funds are the largest category by assets under management, but it may also point to the exposure that large UK companies like Shell and BP have to Russian assets. The UK stock market has also held up well year-to-date compared to its peers elsewhere, so the larger outflow may also represent an element of rotation.”

[1]This delivers the overall net +£42m into equity funds once rounding effects are taken into account.


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.

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