Australian investors cooled their appetite for equity funds in the second quarter, after six months of record buying, according to the latest quarterly Fund Flow Index (FFI) from Calastone, the largest global funds network. Between April and June, inflows to equity funds fell by a fifth (-19.7%) compared to the first quarter of the year and were more than two fifths lower than the net amount of capital added in the fourth quarter.

Q2 follows six months of record buying and inflows to equities were still very healthy

Despite this decline, the A$2.4bn net inflow was still high, around double the average quarterly total since early 2019 and was more than more than three times higher than the same period in 2020. Calastone’s FFI:Equities in Q2 registered 56.4[1], meaning that for every A$1 of sell orders, Australian’s bought A$1.29. This is a solid reading compared to investors elsewhere around the world for a large asset class like equities, continuing a trend of greater confidence in equities among Australians than their international counterparts.

Initially, the slowdown in buying affected funds focused on overseas equities, but the picture changed as the quarter progressed

Over the whole three-month period, net buying of funds focused on Australian equities held up better than most other geographical flavours of equity fund, at least initially. Inflows dropped by just 6% quarter-on-quarter to A$942m, taking the FFI: Australian Equities down to 57.6 for the quarter, its lowest since Q3 2020. Global funds saw inflows drop by more than a fifth (-21%), while regionally-focused funds saw inflows fall by two fifths (-40%). This last category was led lower by emerging markets funds, as a stronger US dollar dampened appetite for emerging market assets and infection rates in many emerging-market countries jumped.

By the end of Q2, appetite for Australian assets had dropped markedly, while lower risk bonds rose in favour

Nevertheless, as the quarter progressed, net buying of Australia-focused funds weakened with each passing month, while interest in funds focused overseas began to strengthen again. In June, net inflows to equity funds focused on Australian stocks had almost halved compared to March, driven by sharply increased selling activity rather than a fall in buy orders – sell orders reached a record A$959m in June, while buying held steady. By contrast, having dropped significantly in the first few weeks of the second quarter, net inflows to funds focused on overseas equities were back in line with the average over last year by June.

The loss of momentum for Australian assets was apparent in real estate funds too, which are mostly domestically focused. Inflows fell to A$115m in June, their lowest level in 11 months, and more than a third lower (-36%) than the average since July last year. A 42% quarter-on-quarter jump in net flows of capital to fixed income funds in the second quarter (to a total A$2.2bn) is a further indication of a more cautious approach.

All of this suggests a common domestic explanation.

Ross Fox, Head of Australia and New Zealand at Calastone said: “It appears that nerves about the delta variant of Covid-19 initially caused Australian investors to cut back on buying overseas-focused funds in Q2. But the outbreaks at home that prompted renewed lockdowns have progressively dampened appetite among Australian investors for Australian assets over the last three months. Across the developed world vaccination programmes have forged ahead in most cases far more quickly than ours has here. Having dodged the bullet in 2020, Australia is a sitting duck if infections take off before our vaccination rates catch up with our peers elsewhere. This has given investors pause for thought, evidenced by record sell orders in June. Given the benefits of diversification offered by global funds, it makes sense for Australians to spread their bets a bit.

We are seeing similar nerves in other countries – UK investors turned outright net sellers of UK-focused equity funds in June, despite no evidence that Delta-Covid’s sharply higher infections are leading to serious health consequences there, owing to extremely high vaccination rates.

“We do not want to get carried away and overstate the case. Aussie investors were still net buyers of funds in the second quarter, just with less enthusiasm than they have shown in recent months. The bigger picture suggests that the global economic recovery is strong, delivering positive earnings momentum for equities, both in Australia and abroad. If the current outbreaks are successfully controlled, there is no reason to expect a sudden rush for the exits over the quarter ahead.”

Methodology

Calastone analysed over half a million buy and sell orders every month from January 2019, tracking capital from advisers, platforms and as it flows into and out of managed funds. Data is collected until the close of business on the last day of each month. A single order is usually the aggregated value of a number of trades from underlying investors passed for example from a platform via Calastone to the fund manager. In reality therefore, the index is analysing the impact of many millions of investor decisions each month.

More than 95% of Australian managed fund flows by participant pass across the Calastone network each month. All these trades are included in the FFI. To avoid double-counting, however, the team has excluded deals that represent transactions where funds of funds are buying those funds that comprise the portfolio.

The index is a measure of investor conviction, placing the net flow of capital into the context of overall trading volumes. It also allows the reader to compare flows in asset classes of different sizes – $100m of inflows may be very large for a small, relatively new asset class like ESG equity but very small for a huge category like fixed income. A reading of 50 indicates that new money investors put into funds equals the value of redemptions (or sales) from funds. A reading of 100 would mean all activity was buying; a reading of 0 would mean all activity was selling. In other words, £1m of net inflows will score more highly if there is no selling activity, than it would if £1m was merely a small difference between a large amount of buying and a similarly large amount of selling.

Calastone’s FFI considers transactions only by Australia-based investors, placing orders for funds domiciled in Australia. The majority of this capital is advised, via platforms.

[1] FFI reading of 50 signifies that the value of buys equals the value of sells