Investors pulled money out of active equity funds at an “unprecedented” rate over the summer months, as concerns mounted about the health of the global economy.
This year has been a positive one for markets but the third quarter was overshadowed by a tense market environment thanks to worries like the looming end of the economic cycle, the trade war between the US and China, Brexit-linked political uncertainty and the Saudi drone attack.
Over 2019 to the end of September, the MSCI AC World index posted a total return of 20.09 per cent (in sterling terms), led by the US but also with double-digit gains from the UK, Europe and Japan. As the chart below shows, however, these gains started to flatten over the summer.
Performance of indices over 2019 to end-Sep
Source: FE Analytics
The Calastone Fund Flow Index (FFI) – which analyses the net inflow and outflow of capital to and from open-ended investment funds – shows investors have been pulling money from equity funds at sharp rate over the past three months.
The FFI: Active Equity index dropped to just 44.9 points in the third quarter (where a reading of 50 means inflows equal outflows and any negative reading means net outflows).
In actual money terms, this suggests more than £3.5bn flooded out of active equity funds between July and September, which is more than in the previous three quarters combined.
Edward Glyn, head of global markets at global funds transaction network Calastone said: “As an asset class, equities are firmly out of favour among UK investors, and especially active equity funds.
“What began as a trickle of funds out of active equity funds late last year swelled to a flood over the summer as investors grew more fearful over the health of the global economy. The exodus slowed a touch in September, but it’s now a near certainty that in 2019 active funds will suffer their first full year of outflows.”
Source: Calastone Fund Flow Index
Within active equity funds, those investing in the UK were hit hardest with net outflows of £1.2bn from growth strategies and another £796m from equity income. Funds focusing on equities in Europe, North America and Asia also suffered outflows, although active global funds bucked the trend and captured new investor cash.
“In uncertain times investors would rather spread their risk across the whole range of global stock markets, than attempt to pick the winning region,” Glyn said.
“They are reducing their exposure to equities overall, but allowing their remaining holdings to concentrate increasingly into global funds, already the largest single category by assets under management.”
But while active strategies suffered heavy outflows over the summer, index funds benefitted from their 12th consecutive quarter of strong inflows – with an FFI: Index Equity reading of 56.7 showing £1.7bn of fresh cash taken over the quarter.
Glyn added: “The growing divergence between appetite for active and passive funds is a clear, structural step-change in UK investor behaviour.
“Investors are cementing passive funds into their regular savings plans and trading them far less frequently than their active holdings. Passive equity funds under management in the UK are still smaller than active funds, but they are growing much faster.”
However, the inflows into equity trackers were nowhere near enough to offset the outflows from active funds over the three-month period. This resulted in a net outflow of £1.8bn from equity strategies, which is double the level of withdrawals seen in the quarter before the Brexit referendum.
This weakened investor sentiment was present in the other asset classes monitored by the Calastone FFI. The flight from risk led to continued inflows to fixed income and money market funds as investors sought out perceived safe havens amid the unsettling market noise.
The research also revealed a record 12th consecutive monthly outflow in September from property funds, the worst-ever outflows from high-risk absolute return funds and an unprecedented fifth consecutive quarter of outflows from commodity funds.
Added to this was a sharp drop in inflows mixed asset funds – notable as they typically show much more stability than other categories.
Source: Calastone Fund Flow Index
“The absence of risk appetite by UK investors has been really stark in Q3,” Glyn concluded. “Asset classes associated with greater stability are benefitting from investor nerves. The picture improved a little in September, but it’s too soon to call time on investor fear.”