Calastone reports investors sought out safe havens in April, amid record selling of UK equities funds

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Edward Glyn, Calastone

Global funds network Calastone reports that UK equities funds saw record outflows of GBP836 million in April, with selling focused on riskier categories.

Investors sought out safe havens for their capital in April, according to the latest Fund Flow Index from Calastone.

The firm writes that the outflow from UK-focused funds was broadly based. Two thirds of UK-focused equity funds saw outflows during the period, but those focused on mid-caps and smaller companies featured more prominently on the sell list. 

Among the most heavily sold 20 funds, seven were in these categories, but none was among the 20 most heavily bought ones. Together these two categories of UK-focused equity funds accounted for two fifths of the net outflow from UK equities overall, a much larger share of fund flows than assets under management. 

The firm writes that this also explains why actively managed funds bore the brunt of the outflows- almost three quarters of the net total, as  small-cap and mid-cap funds are more likely to be actively managed.

Out of GBP49 billion invested in equities funds since January 2015, no net new money has flowed into UK-focused funds. 
The UK was not the only region investors chose to avoid in April. North American equity funds saw their second highest outflows on record (GBP285 million). Those focused on Europe also saw sharply higher redemptions month on month (up GBP168 million). Among funds with a sector focus, technology funds saw their fifth consecutive month of net selling.

Global funds stood out with GBP1.58 billion of inflows in April. On a standalone basis this looks very strong, the firm writes, but it can reasonably be considered a correction of excessive negativity in March which saw record selling to the tune of GBP977 million. 

Moreover, two thirds of the April inflow to global funds was devoted to global ESG equity funds, continuing the secular trend of new capital flowing into this burgeoning category (GBP1.0 billion). No month has seen outflows from ESG funds in over three years.
Excluding ESG funds, equity funds overall saw outflows of GBP245 million, the fourth consecutive month of outflows.
Elsewhere, GBP200 million flowed into equity income funds. This was the first month the category has seen inflows for two years. Funds with a global income mandate garnered most of new capital flowing into the equity income category, but a significant portion also flowed into UK-focused equity income funds. 

Among other asset classes, bond funds enjoyed inflows of GBP610 million. Looking below the surface, Calastone’s figures show that the preference for lower risk options was evident in fixed income funds too. Funds focused on short-dated bonds, which are the least volatile and are considered a safe place to park capital in times of great uncertainty saw inflows. Those that invest in inflation-linked bonds were also popular. Those focused on high yielding bonds however, which are a riskier category, saw almost no net new money. Moreover, the majority of funds targeting high yield bonds saw outflows. 

Edward Glyn, head of global markets at Calastone says: “Investors are wary. Everywhere we look, risk-off trades are dominating the picture.

“Outflows from UK-focused funds make sense at present given the weak economic outlook, but we were surprised at just how negative sentiment was. The flow of news on the UK economy has been relentlessly bad over the last few weeks as investors have absorbed the limited and heavily criticised set of measures announced by the Chancellor to protect households from soaring inflation, while tax increases and an economic slowdown will only add to the pressure on household finances. This helps explain why outflows were so large. It is very telling that funds focused on smaller and mid-cap companies have borne the brunt of the selling – these companies are much more exposed to an economic downturn. A noticeable switch into UK-focused funds with an income focus is the flipside to this trend.

“Selling of technology funds and US equities are two sides of the same coin, given the dominance of the global technology giants on the US stock market – rising bond yields are a killer for highly valued tech companies. The sharp falls in tech share prices in recent months are making investors increasingly wary. Meanwhile outflows from European equities reflect the expectation of a European recession and persistent inflation in the region as war rages on its eastern borders. 

“Against this backdrop, income funds offer something of a safe haven – both those with a global and those with a UK focus - so the patterns of trading suggest there is a switch taking place from growth to income. That makes sense in the current climate.

“The inflows to global funds might seem strange, but taken across March and April together, these funds have also seen outflows (as have UK, European and technology funds), and where there is interest in global funds, it has been heavily focused on ESG, which is well suited to a global approach, and which is proving resilient even in times of significant investor nerves. Having only recently begun to join the mainstream, ESG funds are catching up on assets under management so they can enjoy inflows at the expense of more established categories in times of investor nerves.”


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