Last year saw equity funds almost suffered their first annual outflow on record, according to Calastone, although they were ultimately saved by the last-minute relief rally after the general election. 
The global funds network – which tracks the net inflows and outflows of open-ended funds in the Calastone Fund Flow Index (FFI) – said 2019 was a year of “very mixed fortunes” for the UK funds industry.
“Stock markets ultimately performed very strongly but strong runs were often followed by sharp, conviction-sapping reversals. The year ended with the bulls in the ascendancy,” the firm explained.
“Across all asset classes, investors added a net £23.1bn to their holdings, a decline of two-fifths compared to the five-year average of £37bn. It was the worst year since 2016.”
Equity funds are the largest cohort of the UK funds industry but the bulk of 2019 saw them hit by net outflows, especially in the first half of the year when they endured “a particularly damaging run of redemptions”.
Even in December, it looked like equity funds were headed for their first full-year of outflows on Calastone’s record.
“However, a landslide general election victory for the Conservative party in December drove unprecedented flows to UK-focused funds and hope of a trade deal between China and the US drove inflows to global, emerging market and North American funds,” the network added.
December saw £2bn go into equity funds – their best month in two years – but despite this strong end to 2019, equity funds’ net inflows for the whole of the year amounted to just £1.3bn. This is one-sixth of the average of the last five years.
Net funds flow - Equity funds
Source: Calastone
But these headline figures hide a “wide divergence” in the flows into different types of equity fund.
Global equity funds have been the strongest category for four years straight and took in a net £4.1bn in 2019. Two-fifths of all capital that has gone into equity funds over the past five years has ended up in global portfolios.
On the other hand, European equity funds marked their 20th month of net outflows in December, with £3bn leaving the sector across 2019. Investors have been worried by Germany’s brush with recession and weakness in the continent’s banking system.
Closer to home, UK equity funds spent much of the year witnessing outflows. This is a trend that has been in play since the country headed into Brexit referendum – indeed, just £1.8bn had gone into the sector since January 2015.
“The record £1bn monthly inflow to UK equity funds in December, one-third of which took place in the two days immediately following the general election, testifies to the sensitivity of fund flows to political developments in this country,” Calastone said.
“For the whole of 2019, UK equity funds attracted £1.5bn of new capital, enough to push the whole equity asset class into positive territory for the whole year.”
But equity income funds continued to suffer. They have seen outflows for 36 consecutive months, with £6.9bn being pulled from this type of strategy over the past five years.
Among the factors that the funds network blame for this aversion are, the prevalence of UK strategies in this space, a lack of income index trackers and the high-profile collapse of Woodford Investment Management following the suspension of its flagship income fund.
Beneath all this, however, is the differing fortunes of active funds and index trackers across the equity space. During 2019, equity index funds took in a net £6.7bn of new money while investors pulled an “unprecedented” £5.4bn out of their active peers.
Calastone Fund Flow Index for active and passive equity funds
Source: Calastone
Only active global funds saw larger inflows than passive ones, with index trackers doing better in every other equity category.
“Low fees are clearly a major attraction. The price war has driven fees on some index funds close to zero as fund managers fight to attract bigger volumes of new funds. Fees on active products have fallen too in recent
years, but remain inevitably higher than index funds. Negative publicity, such as that generated by the Woodford affair, has hit the active industry at a very bad time and further discouraged buyers,” Calastone said.
“Over the last five years active funds still come out on top, attracting £24.2bn, half as much again compared to index funds. But in the last three it’s a very different picture. The £14.3bn of inflows to index funds compares to just £9.2bn for active funds, outpacing them by 55 per cent.”
Looking at the other fund categories, multi-asset products were the big winners of 2019 after benefitted from a net inflow of £10.4bn. While this was lower than in 2017 and 2018, it was twice as large as inflows to fixed income funds and 10 times larger than for equity funds.
There has only been one month in the past five years when multi-asset funds experienced net outflows and over the whole period they have taken in an “astonishing” £56bn, according to Calastone’s figures.
Fixed income funds also had a good 2019, which was their fifth year of solid inflows. They won £4.9bn of new money, similar to the amount taken in 2018.
Net funds flow - Property funds
Source: Calastone
But property funds were hit with record outflows last year. This was reflected in the suspension of the M&G Property Portfolio in December, which was closed to trading after experiencing heavy redemption requests.
“Property funds were the big losers in 2019 and were the only main asset class to see a net outflow of funds,” Calastone finished. “They endured the largest and most sustained outflow of capital on record, as investors withdrew a record net £2.2bn.”