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Jun 07, 2023

UK money market funds hit highest inflows since 2022 mini-budget

ESG equity funds suffer ‘worst ever’ May

Investments in money markets increased at their fastest rate in May as UK investors injected £419 mn ($521 mn).

The inflows were driven by high volatility in bond markets and surging inflation and interest rates in the UK and abroad, as well as the US debt ceiling deal. This is according to the latest Fund Flow Index (FFI) from Calastone, which notes that the only other time when money market funds exceeded these levels was at the beginning of the Covid-19 pandemic as the UK entered its first lockdown.

The inflows recorded this year mark the highest since October 2022 when the government announced its mini-budget, which generated chaos in bond and currency markets in the UK.

Commenting on the data, Edward Glyn, head of global markets at Calastone, explains that bonds with short maturities – those in which money market funds invest – are ‘typically among the least risky assets’ available.  

UK money market funds hit highest inflows since 2022 mini-budget

‘These bonds have yields very closely linked to central bank policy rates, which are of course at their highest levels in more than a decade at present and have therefore been looking attractive compared with still-meagre bank savings rates,’ he says.

Glyn also notes that ‘wobbles in US banking systems’ have acted as a stark reminder to investors of the risks of holding bank deposits above insured thresholds, ‘leaving money markets as an obvious place for wealthier individuals to park surplus cash’.

Calastone’s FFI also shows that ESG equity funds suffered their worst month ever this year: May saw UK investors pulling £304 mn of capital from ESG-related funds. UK equity funds were also hard-hit in May, recording a £302 mn loss, marking their lowest level since the mini-budget.

‘A relatively large volume of two-way trade in fixed-income funds for a lower net inflow indicates more diverse opinion among investors on the asset class,’ says Glyn. ‘This is consistent with volatile market conditions. Some are attracted by higher yields, others deterred by capital losses on funds already invested.’