Investors swapped equities for bonds in June, according to data from the Calastone Fund Flows index, as they looked to take risk off the table and capitalise on higher rates.
In total, a net £662m was withdrawn from equity funds over the course of the month – the largest outflows since September 2022. UK funds were once again the worst affected, with investors pulling £612m from domestic market portfolios, while there were sizeable redemptions for US funds (£542m) and equity income strategies (£324m).
Environmental, social and governance (ESG) funds also suffered, with £369m removed over the month. The asset class has soared in recent years but has come under pressure in the past 18 months as rising commodity prices and a general move towards value stocks hampered returns.
Global and emerging market funds bucked the trend however, both registering net inflows for the month and there was notable support for technology portfolios, with £50m added to tech specialists as the rise of artificial intelligence boosted some of the biggest names in the space.
Edward Glyn, head of global markets at Calastone, said: “In the equity asset class, investors have increasingly focused their buying on global equity funds in recent years. Inflows of £50bn since 2015 have been funded by sales of UK, European and income funds in particular, as well as newly saved capital.
“Alongside a structural investor preference for global funds, from time-to-time different regions come into favour. Emerging markets funds are having just such a moment. They have enjoyed their best six-month run of inflows on record (£1.6bn) as investors leap on relatively low valuations, on the benefits to emerging markets of a weakening US dollar and of the impending turn in the credit cycle.
“As part of the emerging market story, China’s economic recovery from zero-Covid may have disappointed everyone so far, but investors are hoping the government will step in with renewed stimulus to spur the economy back to life.”
Fixed income funds were the main beneficiaries of investors’ flight away from equities in June, with some £880m added over the course of the month. There was also support for money market (cash) funds, with £503m flowing into these portfolios – the second highest on record behind March 2020, when investors fled markets at the onset of the pandemic.
The figures are a continuation of the trends seen since central banks started raising interest rates early last year. Over the past 12 months, investors have pulled £3.7bn from equity funds and pumped £7.3bn into fixed income, as the below chart shows.
Source: Calastone
Glyn said: “Fixed income funds and their money market cousins have not looked so attractive since before the global financial crisis. At the same time, recession fears are stalking equity and property markets – investors are nervous. The result is a flight to safety.
“Money markets currently enable investors to earn an income of 5% or more at very low risk, while fixed income funds, which invest in longer-dated bonds than money market ones, offer the chance to lock into the highest yields in years. They now offer both income today and the prospect of capital gains when the credit cycle turns and market interest rates fall back.”
Gregory Peters, co-chief investment officer at PGIM Fixed Income, noted that inflation is now starting to fall back, particularly in the US, which could cause central banks to slow down or even put an end to the hiking cycle.
As such, he said we are “in the early innings of a new bond bull market” and that the “next phase of the cycle will be an optimal period for investors to identify opportunities to generate alpha” in fixed income markets.