Investors pulled money from equity funds for the first in more than two years as sentiment towards risk assets remains muted despite the ongoing 2019 rally, according to the latest Calastone Fund Flow Index (FFI).
The global funds transaction network’s findings came as data from the Investment Association revealed that funds held in ISAs have been hit with net outflows for a ninth month in a row, following 2018’s sell-offs.
The Calastone Fund Flow Index analyses the net inflow and outflow of capital to and from open-ended investment funds.
Equity FFI vs All Assets FFI
Source: Calastone FFI
It is designed to show more than just how much money went into or left a fund over a given period, looking instead at flows relative to the total value of units bought and sold in those funds.
An index reading of 50 indicates that new money into funds equals the value of redemptions from them; a reading of 100 would mean all activity was buying while a reading of 0 would mean all activity was selling.
During February, the FFI: Equity reading fell to 49.1 – which is the lowest reading seen in the index since the run-up to US presidential election in 2016.
Most categories of equity fund saw outflows in February, but the key driver of February’s outflows was the heavy selling of European funds. European equity strategies have were hit by outflows in nine of the last 10 months, with £292m leaving them last month.
Equity funds focused on emerging markets, north America and specific sectors also suffered outflows in February, while equity income funds had their 22nd straight month of net redemptions as investors found more attractive yields in the fixed income space.
UK equity funds were an exception to this as £160m of new money went into this category while global funds also benefitted from net inflows.
As equity funds were hit with outflows, fixed income strategies captured inflows.
UK Equity FFI vs Europe Equity FFI
Source: Calastone FFI
The FFI: Bonds reading stood at in 55.6 in February, which is its highest since September 2018. This meant that bond funds took £426m of fresh investor cash during the month.
The yield curve has flattened recently on the back of fears of a global economic slowdown, as rising short-term interest rates narrowed the gap with long-term interest rates. This improved the relative attractiveness of lower risk, short-term bonds and highlighted them to investors as a relative safe-haven in volatile times.
Edward Glyn, head of global markets at Calastone, said: “Stock markets have recovered dramatically from their December lows. Some commentators are calling this a bear-market bounce and higher share prices have seemingly prompted investors to make the most of the uptick and pull capital out of their equity fund holdings.
“It’s quite natural to see bonds and equities move in opposite directions because they have very different risk profiles. As global risks have risen, so investors have moved away from riskier funds, switching steadily lower-risk options over the last three months.”
At the same time as the Calastone Fund Flow Index was published, the Investment Association released its figures for UK retail flows in January.
Net retail sales were negative during the month, with £859m of outflows from UK authorised and recognised funds. Some £506m was taken out of funds held with ISAs.
Investment Association chief executive Chris Cummings said: “Dry January extended to the fund markets as savers remained cautious, heralding the fourth consecutive month of net retail outflows.
“The threat of a no-deal Brexit, eurozone instability and international trade tensions combined to dampen investor appetite with savers looking towards mixed asset funds to spread their risk.”
Funds’ net retail sales
Source: Investment Association
As noted by Cummings, mixed asset was the best-selling asset class of January with £367m in net retail sales while fixed income was the second best-selling asset class after taking £253m.
The remaining asset classes – equities, money market, property and ‘other’ (which includes the IA’s Targeted Absolute Return, Volatility Managed, Protected and Unclassified sectors) – experienced outflows.
Laith Khalaf, senior analyst at Hargreaves Lansdown, commented: “While sitting out of the market is understandable given the current political and economic uncertainty, investing is a long-term game and those who watch from the sidelines could miss out on valuable gains if things turn out better than expected.
“Regularly drip-feeding money into the market is a good way to gain some exposure to the upside, while keeping some powder dry in case share prices should fall.
“What is perhaps more concerning in these latest fund industry numbers is the possibility that Brexit is discouraging some investors from using their ISA allowance at all, which would mean missing out on valuable tax breaks. The ISA allowance is generous nowadays, and is likely here to stay, but we shouldn’t take this largesse for granted.”