UK-focused equity funds broke 8-month run of outflows in February
February saw funds focused on UK equities enjoy their first inflows since May 2020 as the vaccine programme raced ahead, according to the latest Fund Flow Index (FFI) from Calastone, the largest global funds network. The significant reversal brings an end to a painful eight-month stint of outflows, second in duration only to the EU-referendum period. During these eight months, UK-focused funds shed £2.2bn of capital. But in February investors tentatively dipped their toes back into UK waters, adding £145m to their holdings.
But cautious roadmap to post-pandemic normality dampened enthusiasm
Investors gave the government’s cautious roadmap back to post-pandemic normality a lukewarm reception, however. In the final week of February, cash trickled back out of UK funds to the tune of £19m. The week was marked by ongoing stockmarket nerves on the back of upset in the bond markets, but even so, UK-focused funds saw bigger outflows than any other equity fund category except income funds (which have a UK bias anyway).
Equity funds saw inflows overall, but significant divergence from one category to another
Overall equity inflows were positive in February, at £961m, generating a marginally positive FFI:Equity of 52.1 (a reading of 50 means buys equal sells). This was a sharp improvement on January which had seen sentiment affected by surging infection rates around the world, but there was significant divergence from one category to another. North American funds saw their first outflows since March 2020. At just -£10m the net figure for the whole month was small, but the second week of February, that saw the first big jump in bond yields, prompted net selling of -£238m. Investors shunned European funds for a second consecutive month. The big winners were emerging market and Asia-Pacific funds that each had their second-best month of inflows on record (+£177m and +£215m respectively). Rising energy prices have also attracted inflows to sector funds focused on energy and alternative energy. ESG equity funds once again saw strong inflows too. Turnover in equity funds hit a record too after adjusting for the number of trading days, indicating a lot of churn in investor opinion.Sharply higher bond yields did not deter investors in fixed income funds
Sharply higher bond yields did not make a significant impact on demand for fixed income funds, however. Bond funds saw inflows of £846m in February, generating a very positive 56.7 for Calastone’s FFI:Bonds. This was lower than in December and January, but those were two of the best three months on Calastone’s record. What’s more, they remained well above the average seen since April last year when central banks stepped up their quantitative easing programmes, buying bonds and suppressing yields (lower yields mean higher bond prices). Turnover in bond funds was the fourth-highest on record. Edward Glyn, head of global markets at Calastone said: “Rising bond yields and the falling US dollar are the big stories in global markets at the moment. For a US market dominated by extremely highly valued tech stocks, rising bond yields are a clear and present danger – with so much of their value tied up in their future prospects, a higher cost of money (or discount rate) is very bad for share prices of these giants. Outflows are the inevitable result. Outflows from European funds seem more linked to the shambolic vaccine rollout that will prolong lockdowns, however. Sentiment on UK equity funds is also going to remain closely linked to the recovery from the pandemic and whether the cautious plan to lift lockdowns starts to slip. UK funds have been so out of favour for so long that some rotation is clearly taking place now too. For their part, emerging markets and Asia benefit when the dollar is weak because it increases their room to boost their economies with extra spending while keeping a lid on domestic inflation. It also reduces the burden of dollar debt that many less developed countries carry.”
