Investors piled out of equity funds in their droves in July, with a net £1.1bn pulled out over the month, a significant increase on the £98m withdrawn in June, according to data from Calastone.
This was the second-largest net outflow from equity funds since Liz Truss' mini-Budget in September 2022. October 2024 was the only other month with higher outflows, when there was a huge wave of profit taking.
The selling was widespread, with every major equity region suffering net outflows with the exception of Europe, where investors added a net £280m.
Global equity funds recorded their second consecutive month of net selling, marking first time this has happened in the 10 years since Calastone started collating data.
It is only the sixth month that global equity funds have suffered net outflows, with £281m being withdrawn in July, down from the £365m pulled out in June.
Edward Glyn, head of global markets at Calastone, said: “Many stock markets around the world are currently trading at or near record levels – the UK, US, Europe, Japan and Singapore are just a few examples.”
A net £330m was withdrawn from US funds, the first month of outflows since October 2024, which were driven at that time by expected capital gains tax changes by chancellor Rachel Reeves.
“Investors must always decide whether to roll with momentum or turn contrarian. The contrarian view is starting to win out, at least as far as the US market is concerned,” said Glyn.
“That is what is likely to make this month of selling different from last October, when booking profits purely for tax purposes motivated investors. That capital was immediately reinvested. It remains to be seen whether investors will stay on the sidelines in the current market.”
There was more bad news for UK funds, with a net £543m withdrawn in July, making it once again the hardest hit fund sector. There was some good news, however, as this was below the average monthly outflow of £858m over the past three years.
“Outflows from UK funds have slowed again month-on-month even as bearishness on equities overall has grown markedly, which means July’s figure should be interpreted as an improvement in sentiment towards UK stocks,” said Glyn.
Funds focused on Asia-Pacific, emerging markets, Japan and specialist sectors all experienced net outflows too.
“Although most geographies saw outflows in July, the selling is mainly a US story. Global equity funds typically have 60-70% weightings in US equities nowadays, so outflows here reflect similar sentiment to North American funds,” said Glyn.
“US stocks are currently the most expensive they have ever been compared to their revenues (3.2x) and at their highest since the dot.com bubble against a range of measures such as US GDP and corporate earnings.”
The rally has been driven by a narrow selection of tech stocks (namely the ‘Magnificent Seven’), which he noted could now be “priced for perfection” at a time when markets are “volatile and uncertain”. This makes the US an “increasingly dangerous place for their [investors’] capital”.
The overall net outflows were a combination of a small increase in active fund sales and a marked decline in passive fund purchases.
Net selling of active equity funds increased £150m to £1.6bn, but was not counteracted by passive funds to the same extent as it has been in the past.
Glyn added: “Passive funds remain far more in favour overall relative to active funds, but an apparent reluctance to commit more cash to US equities, particularly in index funds weighted heavily to a handful of stocks, meant even passive global and US funds saw outflows.”
Away from equities, investors pulled a net £122m out of bond funds as “wobbly” markets caused investors to sell, mainly from government bond portfolios.
Safe-haven money market funds continued to enjoy inflows of £217m, while investors piled into multi-asset funds, with £927m added in July.
Property fund net outflows doubled to £41m, up from £23m in June but still half of the £88m averaged over the past 12 months.
Glyn said: “Investors are worried about spicy equity valuations, especially in the US market, and have gone cool on that asset class for the time being. Participants in the commercial property market, however, are cautiously optimistic, especially in sectors like logistics, and this may be helping to take the edge off sentiment around the open-ended property fund segment in particular.”