UK-focused funds hit with record outflows in January as buyers go on strike ______

Record £795m outflow from UK-focused equity funds in January

Record outflows hit UK-focused equity funds in January, according to the latest Fund Flow Index from Calastone, the largest global funds network. Investors sold down a net £795m of their UK-focused equity fund holdings, comfortably beating the previous record set in June 2020.

Although the selling was heaviest when global markets swooned on 21st and 24th of January, the subsequent rebound was not accompanied by investor buying of UK-focused funds. Outflows took place on every day of the month except the 3rd January. In other words, the poor figures for January were not the result of one or two bad days, but part of a steady trend of cash leaving the segment.

Cumulative outflows over eight consecutive months of selling reached a record £2.9bn

The distaste for UK assets has been a feature of sentiment for some time. Investors have now sold UK-focused equity funds for eight months in a row, redeeming a cumulative £2.9bn of their holdings, far more than in any other previous run of selling on Calastone’s record. Even in the nine months of selling that accompanied the Brexit referendum, outflows only reached a cumulative £2.3bn.

Outflow driven by a buyers’ strike, not an increase in selling activity

The outflow in January was driven by a buyers’ strike rather than an increase in selling. The total value of sell orders was almost exactly in line with the long-run average. But the value of buy orders dwindled to just two thirds of the average for the last year. Sells outweighed buys by 1.5:1 in January generating a Fund Flow Index – FFI: UK-Equity – of just 39.7, a very weak reading.

Appetite for other categories of equity funds overall was much steadier as inflows continued

Elsewhere, Asia-Pacific and European equity funds also saw increased outflows as the latest wave of the pandemic caused significant disruption, but each of these only suffered net selling one tenth of the level of UK-focused funds. Emerging markets and North America enjoyed inflows, though below their average. Inflows to global funds also fell following recent strong buying, but were still in line with longer-run trends. The majority of the global fund buying was driven by appetite for ESG strategies, though ESG inflows also fell to their lowest in over a year. Overall, however, funds focused on international equities continue to attract interest from investors eschewing domestic stocks. In January, these non-UK-focused funds absorbed £998m of new cash, down from £1.3bn in December.

Collectively, the cooling of interest in equities took net inflows overall down to £202.5m, less than one fifth of the average for the last year.

Fixed income and mixed asset funds also saw inflows fall significantly

Among other asset classes, net inflows to fixed income funds also fell back from the temporarily elevated levels seen in December. At £281m, inflows continued a trend of steadily diminishing interest from investors. Inflows to mixed asset funds were also lower, while property funds suffered their 40th consecutive month of outflows. At £39m in January (and similar levels in November and December), the net selling is now, however, much more manageable for fund managers, following sustained outflows at several times that level before and during the worst of the pandemic[1].

Edward Glyn, head of global markets at Calastone said: “The record outflow from UK equity funds is extreme in the context of the relatively benign stock market performance and what is going on elsewhere. Apart from a brief convulsion in the middle of the month, the UK indices were roughly flat in January, contrasting with a sharp drop in US share prices. Looking at potential triggers, the Omicron wave, for example, is passing with much less disruption than in many other parts of the world. Political chaos in the UK may be colouring perceptions, but since this is not reflected in share prices, it is surprising that fund flows are taking a different course.

“The big negative is rising interest rates which are off the blocks in the UK faster than anywhere else in the developed world as the Bank of England moves to squeeze out soaring inflation. But UK equities are less sensitive to rising rates than markets like the US, whose big tech names have been clobbered by the inescapable maths that crimps their value when long-term interest rates go up. So it seems surprising that investors are so keen to ditch domestic holdings relative to those invested abroad.

“It is possible that UK share prices have been supported by a rotation out of higher value stock markets by foreign buyers. Meanwhile UK investors in UK-focused funds may be scarce because this category is already the one they hold the most, so in uncertain times when they are more cautious on equities full stop, UK-focused funds feel the greatest impact.

“The rising interest rate theme is behind the general caution we are seeing across all asset classes which have all benefitted from the ultra-cheap money that has flooded the financial system in recent years. This era seems to be coming to an end leaving investors in a quandary on what to do with record levels of savings needing a home. For now, they are accumulating ever more in cash deposits.”

[1] Excluding the months in 2020 when funds were gated

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.