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ESG equity funds suffer worst ever month on record

Paloma Kubiak
Written By:
Paloma Kubiak

ESG equity funds recorded more than £300m of outflows in May – their worst ever month – while UK investors took shelter in money market funds, adding £419m of capital.

The ESG boom appears to be over with this sector suffering the worst month on record, as investors offloaded £304m of capital in May.

May was also the second month on record where investors have been net sellers in this sector over the past five years, according to global fund network Calastone.

Its fund flow index revealed investors piled into money market funds for their relative safe haven status as well as high yields, with this sector absorbing £419m.

This is the highest amount since the aftermath of the disastrous mini Budget in October 2022, and the second-most since the Covid-19 lockdown began in March 2020.

Calastone explained this was down to the high volatility in bond markets which signalled concerns over inflation, the likely path of interest rates in the UK and abroad, the US debt ceiling and the outlook for economic growth.

Edward Glyn, head of global markets at Calastone, said: “Money market funds invest in bonds with very short maturities, so they are typically among the least risky assets available. These bonds have yields very closely linked to central bank policy rates which are of course at their highest levels in over a decade at present and have therefore been looking attractive compared to still meagre bank savings rates.”

Glyn added that “wobbles in the US banking system” have reminded investors of the risks of having bank deposits above insured thresholds too, “leaving money markets as an obvious place for wealthier individuals to park surplus cash.”

On the flip side, investors curbed fixed income inflows – funds which invest in bonds with longer maturities – but still added to their holdings as they were attracted by high yields.

Here, investors ploughed a net £318m in May which is half the average of the last year. It is also down by three quarters from January’s five-year high. Drilling into the data, Calastone revealed most of the new capital made its way into corporate bond funds which invest in debt issued by large companies.

Equity and property fund outflows

Another sector reversal occurred in equity funds. Investors withdrew a net £302m in May, the worst figure recorded since the mini Budget.

UK-focused funds were hardest hit with outflows of £583m, while global funds and emerging market funds saw inflows totalling £849m and £212m respectively. Calastone said the May outflows were driven both by a sharp drop in buying activity as well as a small increase in selling.

Elsewhere, mixed asset funds and property funds also suffered outflows, with the latter seeing investors sell a net £46m of their holdings, the worst month for the sector since January 2023.

Glyn, added: “May’s bond market ructions had surprisingly little impact on share prices but fund investors, recognising that higher yields are bad for stock markets, clearly contracted buyer’s remorse after ploughing so much cash into equites in the previous two months. Most stock markets were flat across the month, with the exception of the UK, where the index fell as equity investors reeled at the impact of UK bond yields soaring above Italy’s for the first time since the mini Budget.”