Liz Truss’s resignation as prime minister on 20 October helped stem outflows from UK equity funds, according to the latest Fund Flow Index from Calastone.
Investors still withdrew a net figure of £424m from UK funds in October, the 17th consecutive month of outflows. Nevertheless, this was the best month since March for the category, which has shed £6.7bn of capital year-to-date – a figure three times higher than that for European equities, the next worst fund category in any equity sector.
“Improved global market conditions helped reduce selling activity in UK funds during the month, but it was the swift dispatch of Liz Truss, the ill-fated shortest-serving prime minister, that was the key factor in staunching the outflow of capital,” said Calastone.
“In the tumultuous six days before her resignation, which included the firing of her chancellor Kwasi Kwarteng, investors sold a net £238m of UK-focused equity funds. In the three days following her departure, which included the installation of Rishi Sunak as prime minister, these outflows briefly turned to modest inflows of £2.5m.”
Overall, October was among the 10 worst months for equity fund flows since Calastone started running its study in 2018. This was despite the fact equity outflows slowed dramatically to £422m, having hit records in August and September of £1.9bn and £2.3bn respectively.
There were significant differences between equity funds focused on particular geographies and categories, however.
North American funds were the hardest hit in October, suffering outflows of £684m, the third consecutive month of record selling.
“Three-quarters of the selling took place in the second half of the month as the US stock market was recovering, suggesting investors opted to sell into strength rather than chase prices higher,” said Calastone. “European equity funds shed £207m.”
Non-environmental, social and governance (ESG) global funds also suffered outflows. Yet once again, global ESG funds bucked the trend, enjoying a net gain of £776m, their best month since April.
Specialist sector funds also attracted new cash in October, the 24th month in a row of inflows. In total, £136m flowed into the sector, close to the average monthly total in the past two years. The most popular areas were green energy and healthcare.
Meanwhile, the real estate sector suffered its worst month since June 2021, when the Delta wave of Covid-19 was peaking.
“Investors sold a net £184m of their property fund holdings as the fallout from the mini-Budget, along with concerns over global growth, hit sentiment towards property,” said Calastone.
Elsewhere, falling bond yields encouraged more buying of fixed income funds, with investors adding a net £336m to their holdings in October.
Edward Glyn, head of global markets at Calastone, said it was too early to tell whether the current rally marks the end of the bear market or is just another bear trap.
“Investors in equity funds clearly think it’s the latter,” he added. “So while October was calmer for equity funds, it did not mean an end to outflows.”
Share prices are determined by profit expectations and interest rates, and for most of this year, they have suffered from a rise in the latter. But Glyn said that attention is now turning to the likely impact of an economic recession on profits.
“Profit warnings are already on the up and economies are slowing fast, but until inflation shows signs of coming under control, central banks are in no mood to return the punchbowl to the party,” he added. “Investors are judging that this is bad for equities.”
He also said the hit to US equity funds may reflect the high-profile crash in some of the US’s largest and most famous tech names, such as Meta and Amazon.
“Meanwhile, trading activity in UK-focused funds has shown that political risk remains uppermost in investors’ minds,” he finished.