UK equity funds suffered record outflows in April as investors turned to safe havens amid pessimism on the domestic economy, the Russia/Ukraine war, surging inflation and rising interest rates, according to new figures from Calastone. 
The global funds network’s Fund Flows Index – which monitors inflows and outflows among funds for sale in the UK – found that £836m was pulled out of UK equity portfolios last month. This means these funds have failed to capture any new net inflows for the past seven years.
Two-thirds of UK equity funds were subject to outflows in April, with those investing in mid-caps and smaller companies being disproportionally hit: these kinds of funds accounted for two-fifths of the net outflow from UK equities, a much larger share than their assets under management.
Edward Glyn, head of global markets at Calastone, said: “Outflows from UK 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 past 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.”
Net flows for UK-focused equity funds
Source: Calastone Fund Flows Index – Apr 2022
However, the UK was not alone in being hit with outflows last month. The Calastone Fund Flows Index shows that North American equity funds had their second highest outflows on record after £285m was pulled out, while outflows from European equity funds were £168m higher than in the previous month.
Technology funds suffered their fifth consecutive month of net selling after investors turned against growth stocks in light of higher interest rates. Growth stocks tend to struggle when rates are rising, as investors are less willing to pay up for future earnings.
“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,” Glyn added.
“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.”
Global equity funds appear to be a bright spot in this picture after they enjoyed inflows of £1.6bn in April. However, it’s worth keeping in mind that this follows a record outflow of £977m in March – Calastone said April’s inflows “can reasonably be considered a correction of excessive negativity”.
In addition, two-thirds of the April inflow headed into global ESG equity funds, which have proven very popular with investors recently and have not had a monthly net outflow in more than three years.
There was a £200m net inflow into equity income funds last month, reflecting the desire for investors to find safe havens. It was the first month in two years that these funds have captured new investor money.
Also highlighting the risk-off sentiment is a £610m net inflow into fixed income funds. Calastone added that there was a preference for lower risk options here too: funds focused on short-dated bonds, which are considered a safe place to park capital in times of uncertainty, benefitted from inflows as did inflation-linked bond strategies.
“Investors are wary,” Glyn said. “Everywhere we look, risk-off trades are dominating the picture.”