Inflows into funds bounced back after a challenging year in the opening month of 2019, according to global funds transaction network Calastone, but there is little to suggest investors are back to being fully bullish. 
Data published last week by the Investment Association showed the impact on fund flows of a 2018 marked by falling markets, trade wars, Brexit and tighter monetary policy – especially after sentiment was hit by a significant sell-off in the fourth quarter.
Over the course of last year, retail fund sales dropped to just £7.2bn. This was down sharply on the record-breaking inflows of £48.5bn, when funds benefitted from rallying markets and historically low levels of volatility.
Calastone Fund Flows Index (All Assets)
Source: Calastone Fund Flow Index
However, at first glance it appears that the first Calastone Fund Flow Index (FFI) of 2019 contains some good news. The index, which tracks monies from IFAs, platforms and institutions as they flow into and out of investment funds, climbed to 53.2 points in January.
A score of 50 indicates that inflows into funds equalled outflows over the month. In December 2018, the index sat at 50.1 points – which was its lowest reading since October 2016 and a fall of 99.3 per cent when compared with the index one year earlier.
But Calastone head of global markets Edward Glyn said: “Fund flows were certainly better in January than in December, but the figures were in truth weaker than they appear at first glance and the trend is still downwards.
“Uncertainty over economic prospects and geopolitical events is clearly discouraging investors from committing new capital to funds, but the extreme financial market volatility that also results from this uncertainty has its own deterrent effect.”
Calastone pointed out that an FFI reading of 53.2 points is below the long-run average and in January was largely dependent on investors buying mixed asset funds with other asset classes being either broadly neutral or suffering outright outflows.
Last month, mixed asset funds accounted for nine-tenths of net fund inflows, which helped to offset weaker demand for them in recent months.
However, Calastone highlighted the fact that they are often used prominently in regular savings plans, meaning it is the asset class that typically sees the least flow variability from month to month.
Indeed, the funds transaction network noted that there has only been one month in at least the last four years where mixed asset strategies had net outflows. “Even then it was vanishingly small,” it explained. “This makes mixed asset funds poor barometers of investor confidence.”
Calastone Equity Fund Flows Indices
Source: Calastone Fund Flow Index
A look at Calastone’s data on equity fund inflows in January demonstrates this: the FFI Equity reading was 50.9 points, which is only just above the neutral 50 mark.
Equity inflows of £225m were one-quarter of the long-run monthly average, but overall volumes of two-way trade were roughly in line with normal activity as investors switched between funds rather than add to holdings.
Investors were positive on global equity strategies, which took in £651m and registered a “very strong” index reading of 66.3 points. Global funds are the only category of equity fund not to have any net monthly outflows in the last three years.
But European equity funds were the weakest during the month and were hit with their largest net outflow since the aftermath of the Brexit referendum. North American equities witnessed modest outflows while flows to Asian equity funds remained at two-year lows.
UK equity funds are the largest category of funds under management but only captured a “tiny” £14m of inflows over the month; the FFI UK Equity index had a reading of 50.3 points.
Glyn added: “Brexit casts a dark cloud. Since the Brexit referendum, no net new money has been committed to UK equity funds, despite UK equities being by far the largest investment fund category in the UK funds market, easily the largest category, while property funds are enduring intensifying capital flight.
“Unprecedented volumes of capital have also fled offshore rather than face the uncertain regulatory environment in the UK after the 29 March.”
Value of funds flowing offshore – three-month rolling average
Source: Calastone Fund Flow Index
The above chart illustrates Glyn’s last point. A cumulative net £57bn has flowed into funds that lie outside the UK’s regulatory jurisdiction in an “unbroken run” since the Brexit referendum campaign kicked off in the spring of 2016; before that, inflows roughly balanced outflows for offshore funds.
In January, net inflows to offshore vehicles were positive in every asset class except money market funds. Offshore investors were particularly positive on equities in January than those in UK-domiciled funds, but they only focused on global and emerging market funds.
Summing up the results of January’s Calastone Fund Flow Index, Glyn said: “Structurally, fund flows are positive, given the need for households to build savings over time, but at present our index shows a clear nervousness about timing new investment.”