£581m pulled from equity funds in February

The latest Fund Flow Index from Calastone showed that outflows from global equity funds accelerated in February.

The index showed the global mutual funds industry saw investors pull £581 million from equity funds last month.

Calastone said the higher yield environment is prompting an asset allocation switch from equities to bonds.

Since July 2022, investors have added £4.93 billion to their fixed income fund holdings while withdrawing £5.06 billion from equity funds.

UK equities were by far the least popular sector with their domestic investors in February.

UK investors pulled £962 million from their UK-focused equity fund holdings, making it the third worst month for the sector on record.

February was the 21st consecutive month of outflows from UK-focused equity funds.

Sharp falls in the US stock market prompted redemptions of £368 million from North American equity funds, more than double the level in January, while European equities suffered their 17th consecutive month of outflows as investors pulled £250 million of capital from the sector.

A £50 million outflow from Asia-Pacific almost exactly reversed January’s modest inflow.

Calastone said however that it was not all bad news for equity funds.

Those funds with a global mandate gained £1.08 billion in new capital in February.

ESG mandate funds accounted for 43% (£466m) of this global mandate inflow, with ‘traditional’ global funds making up the rest (£613m).

The deterioration of conditions in the bond markets also meant reduced inflows to fixed income in February compared to January’s near-record net purchases.

Despite this reduction, bond funds were nevertheless popular in February, attracting a net £834 million of inflows, the third best in two years.

Edward Glyn, head of global markets at Calastone, said: “Stock markets have sagged on the realisation that the interest-rate medicine prescribed to control inflation will be needed in higher doses and for longer.

“The UK economy may need more rate hikes too, but its stock market nevertheless has some natural resistance to the valuation compression that higher rates mean for asset prices, owing to its relatively low growth/high cash flow profile.

“Yet UK investors cannot be persuaded to stick with UK equities, despite their extremely strong relative performance over the last year.

“It is clear that a structural diversification is under way to reduce the relatively heavy weighting in UK investor portfolios to UK-focused funds.

“The general air of pessimism over the UK’s economic decline, weak government finances, political chaos and rising corporate taxes seems to have accelerated this trend with consistent outflows from UK funds and inflows to global ones.

“The inflows to fixed income funds are interesting. Like equities, bonds have also endured a bear market over the last year, yet these funds have enjoyed inflows even as equity funds have suffered outflows.

“There are two factors at play. First, investors are structurally overweight equities. Years of strong market performance not only attracted new cash to equities but also saw existing holdings swell in value – equity funds assumed an ever-larger weighting in investor portfolios as a result.

“Equity and bond prices have already suffered the value compression that comes with higher interest rates, leaving bonds offering the most attractive yields since before the Global Financial Crisis, as well as the prospect of capital gains if a recession bites and market interest rates fall.

“Meanwhile, equities are at risk from a second downturn if that same recession bites into profits.

“A combination of enticing interest income and potential capital gains along with fear of losses on equities and the need to restore a healthier asset mix are therefore all working in favour of fixed income at present.”