Rising fears over inflation and interest rates, coupled with disillusion about UK assets, drove net selling of equity funds in October for the first time in 15 months, according to research by global funds network Calastone.
According to Calastone’s latest Fund Flow Index (FFI), savers cashed in a net £148 mn ($202 mn) of their equity fund holdings. While this may be small in the context of total trading volume of £20.5 bn, it was enough to push Calastone’s FFI: Equity to 49.6, its worst monthly reading since July 2020.
Passive equity funds were hardest hit by selling activity, suffering record outflows of £709 mn, almost five times more than the previous record set for outflows from passive funds in July this year.
Edward Glyn, head of global markets at Calastone, comments: ‘Share prices globally had a pretty good month in October after a shaky September, so it’s perhaps surprising that investors pulled money from a rising market. They have some good reasons to be nervous. Spiking inflation and higher bond yields are bad news for the valuations of growth companies. The net outflow we saw in October was by no means a rout, however, and it may simply point to modest profit-taking at a time of record share prices.’
Whereas inflows to passive funds easily outpaced active funds almost every month for more than two years up to November 2020, a shift has seen passive funds either attracting less new capital than active funds, or experiencing outflows when active flows have been positive in 10 of the last 12 months.
When examining the UK, Calastone’s research shows that UK-focused equity funds were hit by the second-worst outflows on record. Unlike most other geographies, however, these outflows were not limited to passive funds, with active funds also shedding £393 mn. This made the total net outflow from UK-focused equity funds £618 mn in October. Moreover, October saw the fifth consecutive month of outflows in UK-focused equity funds, a run of selling that no other geographical category of equity fund has seen this year.
Commenting on the UK landscape, Glyn says: ‘The picture is being exaggerated by the particular distaste UK investors are showing for their home market. Some of this is part of a healthy long-term trend of rebalancing portfolios away from a structural overweight in domestic stocks, but this rebalancing is normally achieved by simply putting new cash elsewhere rather than outright selling. The current picture can only be explained by a loss of confidence in the UK’s prospects as quantified in the Office for Budget Responsibility’s recent assessment of the damage being done by the pandemic and Brexit.’
It is ESG that can be thanked for overall active flows being strongly positive. Calastone’s research finds that active ESG equity funds remain the runaway success story among all active funds, enjoying £568 mn of inflows in October and taking the year-to-date total to £8 bn. Most of this has been devoted to active global ESG strategies.
Overall, the October inflow was large enough to offset outflows from other active categories that did not have ESG mandates. ‘With climate change dominating the headlines, and with some of the world’s most polluting industries taking a large share of global (and especially UK) market capitalization, investors are perhaps realizing that passive funds often don’t meet their growing need to align their investments with their world view,’ Glyn concludes.