UK’s September turmoil sparks flight from UK equity funds as outflows hit second-worst month on record ______

Funds focused on UK equities suffered heavy selling from investors spooked by the multiple crises afflicting the UK in September, according to the latest Fund Flow Index from Calastone, the largest global funds network. Investors sold down a net £567m during the month, the second-worst month for UK equity funds on the Calastone FFI’s seven-year record. September stood out because investors clearly singled out UK-focused equity funds. This contrasted with the situation in June 2020, the worst month on record, as investors at that time sold heavily across almost all equity categories in order to take profits after the sharp increase in global markets sparked by huge stimulus from central banks.

Active UK equity funds bore the brunt of the selling, but ESG was protected

Active UK-focused equity funds bore the brunt of the September selling, accounting for 98% of the overall outflow from UK-focused funds during the month. This is consistent with the more discretionary approach investors take with active funds – asset allocation decisions like this are much more likely to be applied to active funds, while passive funds, usually cemented in regular savings plans, see much less volatile trading. Calastone also noted that ESG funds investing in the UK continued to enjoy modest inflows – it was non-ESG funds that saw all the selling.

Other geographical categories saw inflows

While investors pummelled UK-focused funds, most other categories continued to enjoy healthy inflows. Emerging market funds for example saw record inflows of £407m, global funds £805m (lower than in recent months but ahead of the long-run average) and North American funds £230m. Even relatively unloved European equity funds added a modest £37m during the month. Meanwhile equity income funds, which are heavily allocated towards UK equities, suffered outflows in common with the pure UK-equity strategies.

Bearishness on the UK dragged overall inflows to the lowest level since January

The large outflow from UK-focused funds dragged down the overall September net inflow for equity funds to its lowest level since January 2021 (£450m in September). Once again, investors clearly favoured ESG equities, adding £1.1bn, the second highest monthly inflow on record, while withdrawing £690m from non-ESG equity funds (with the brunt of course borne by UK-focused strategies). ESG’s success means that £3 in every £5 investors have added to equities in 2021 have flowed into ESG funds.

Rising bond yields dampened enthusiasm for fixed income funds

Elsewhere, fears surrounding rising bond yields dampened appetite for fixed income funds – inflows continued but at a level well below the average for the last year. Meanwhile outflows from property funds remained at the much lower levels seen over the last three months compared to the painful flood of capital that has left the sector since fund suspensions were lifted in autumn 2020.

Edward Glyn, head of global markets at Calastone said: “The petrol panic, soaring inflation, empty supermarket shelves, fractured supply chains, crippling staff shortages and turmoil in gas and electricity markets are all taking their toll on investor confidence. With so much going wrong so quickly, investors have voted with their feet and dumped UK assets. Investors know that other parts of the world are also experiencing some of these difficulties, but inflows to funds focused on other regions emphasise that they realise the problems are more widespread and more acute in the UK than elsewhere.

It has been an unusually hapless month for the UK. We have all strapped in for a bumpy few months of news ahead, so we should also brace for further volatility in fund flows for UK equities.”

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