Investors allocated more to global equity funds in February despite a month of outflows for stock portfolios, according to new data from Calastone.
They took in around £1.1bn in new capital during the month, with most of the net buying taking place in the first week as markets were still rising.
‘Traditional’ global funds were the primary driver of this trend, accounting for 57% of the inflows (£613m), while investors paid £466m into global funds with an environmental social and go vernance (ESG) mandate (43% of inflows).
However, February was a month of outflows for equity funds, with investors withdrawing £581m in total. 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.”
UK equities were the least popular sector with domestic investors despite the FTSE 100 reaching a record high in February.
February was also the third worst month on record for the sector as UK investors withdrew £962m out of domestic funds – the 21st consecutive month of outflows. They removed £868m from UK funds in January, meaning more than £1.7bn has been withdrawn from these portfolios since the turn of the year.
Glyn said that the UK economy needs more rate hikes but stressed that its stock market has a “natural resistance” to the valuation compression induced by higher rates.
He added: “It is clear that a structural diversification is underway to reduce the relatively heavy weighting in UK investor portfolios to domestic 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 UK was not the only place to suffer. Investors redeemed £368m from North American equity funds, more than double the amount they withdrew from the region in January. This followed sharp falls in the US stock market.
European equities also experienced a difficult month, with investors pulling £250m of capital from the sector. February was the 17th consecutive month of outflows for European equities.
In comparison, fixed income funds attracted a net £834m of inflows in February, the third best in two years. However, it is still a slowdown compared to January, when investors allocated £1.2bn to the sector through the month.
Calastone stressed that an asset allocation switch from equities to bonds has been taking place in recent months due to a higher yield environment.
Since July 2022, investors have added £4.9bn to fixed income fund holdings while withdrawing £5.1bn from equity funds.
Glyn said that two factors can explain this trend: investors being structurally overweight equities after years of strong market performance and the current risk of recession.
He said: “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.
“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.”