Calastone reports active funds take huge hit in difficult January
The latest Fund Flow Index from Calastone shows that fund flows into active equity funds dropped 93 per cent over the month, as nine-tenths of January’s overall net equity inflow went into index funds.
UK equity fund inflows dropped sharply in January, failing to maintain the momentum generated by a surge of inflows that gave equity funds their best month in two years in December 2019.
Net inflows fell by more than two-thirds to GBP618 million in January. Two-fifths of this new capital flowed into UK equity funds, though the inflow to UK equities dropped by three quarters month on month, as the post-election bounce in sentiment faded and coronavirus news began to hit.
Calastone comments that active funds are much more sensitive to changes in sentiment, so the negative coronavirus news hit inflows here much harder. The small GBP78 million inflow for active funds belied how confidence drained away as the month progressed.
The total trading volume (ie the value of buys plus the value of sells) increased slightly in January (up 3.2 per cent) to GBP16.1 billion, the second-highest month since April 2018, thanks largely to a sharp increase in selling activity. The drop in net inflows in January was caused mainly by this higher selling activity. Slower buying activity also contributed to the decline in net inflows, but to a much lesser extent.
Lower inflows on higher overall volumes dragged Calastone’s FFI: Equity down to 51.9 in January (a neutral 50 means the value of buys equals the value of sells), still in positive territory, but well below the bullish reading of 56.7 in December.
However, Calastone comments that it was a month of two halves. “As news of the coronavirus outbreak began to emerge, investor confidence dropped. In the first half of the month, before the virus had begun to make the news, equity funds saw GBP475 million of inflows, but this slowed to just GBP141 million in the second half of the month as investors pared back the optimism that more positive news on the global economy had instilled in December.
“This was a distinctly ‘active equities’ phenomenon as investors absorbed the likely hit to industrial sectors like airlines, and regions like Asia. Index funds were relatively unaffected, but active funds saw inflows of GBP206 million in the first half of the month turn to outflows of GBP128 million in the second half, after the coronavirus news hit. Among the other main asset classes (fixed income, multi-asset and real estate) flows were broadly balanced over the course of the month.”
Calastone reports that Asia focussed funds were the worst hit, suffering their worst month in two-and-a-half years. A net GBP61 million left the sector in January, the weakest since July 2016.
Among the other main asset classes, inflows to the relative safe haven of fixed income funds rose and were 50 per cent higher than their 12-month average, while outflows from property funds slowed to their lowest level since May 2019. Inflows to multi-asset funds fell month-on-month too, Calastone reports.
Edward Glyn, Head of Global Markets at Calastone says: “Stock markets have swooned since the coronavirus hit, as share prices have been marked down sharply in the expectation of slower global growth. The response of fund investors shows how the virus was most impactful for fund categories where its effect will be greatest, like Asia. But active funds also faced problems. The investor verdict on active equity funds was swift and decisive but passive funds were untouched. In times when confidence is weak, active funds bear the brunt of selling, while passive funds are relatively unscathed. By the same token, a sudden upturn in confidence, like we saw in December, is far more positive for active funds. Passive funds are cemented into regular savings plans via ISAs and pensions so investors clearly do not tinker with their passive holdings that much. By contrast, they trade their active funds much more dynamically, responding quickly to market events as they happen.”