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ESG funds ‘exploding in popularity’ as July sees record inflows

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Investor interest in ESG saw record inflows to the sector in July, stemming the outflows from equity funds in the month.

Investors pumped £362m into ESG (environmental, social and governance) funds in July, setting a new record, according to fund technology company, Calastone.

Further, inflows into ESG into each of the last four months set a new record, with a total of £1.2bn added. This is higher than five years’ worth of inflows.

Money added to ESG funds also helped buck the trend of outflows from equity funds overall in July – its second consecutive month of outflows – after shedding £240m in the month.

The majority of ESG funds are global, accounting for one third of inflows to global funds in the previous year.

Calastone’s latest Fund Flow Index also noted that ESG funds are “currently the main area of real strength for active funds” and due to their global nature, they are also “benefitting from investors preference for growth rather than value holdings”.

Funds focused on UK equities were hardest hit, seeing outflows of £377m in July, taking the two-month total outflow from UK equities to almost £1.1bn.

Investors redeemed £705m of their equity income fund holdings, taking outflows to a record for the second month in a row.

Calastone also noted that while European equity funds have seen outflows for 26 consecutive months, in July they shed just £62m, the lowest level in almost two years, and well below the average £211m figure.

“The reduction in negative sentiment towards European funds reflects a relatively effective response to the pandemic”, Calastone said.

‘Global funds are benefiting’

Edward Glyn, head of global markets at Calastone, said: “Caution on equity markets has prompted outflows from equity funds for two months in a row. Weakness in stock markets in July seems to have justified that scepticism and ensured that June’s outflows from equities continued though at a lower level. But even though capital is leaving equity funds overall, a wide gulf is opening up between those funds in favour and those leaving investors cold. The dichotomy between growth and value helps explains why this is happening.

“Record low interest rates are inflating the value of future profits. Growth stocks in particular have more of their value tied up in ‘the future’ so their share prices benefit significantly more when money is cheap. Stocks where more of the income is being delivered today benefit less – their valuation depends more on things going well right now. With so many ‘value stocks’, many of which have cut dividends hard, it’s no wonder the UK stock market has underperformed in the global market rally since March. This explains the outflows from UK-focused funds and helps explain the increased surge in outflows from income funds.”

Glyn added that global funds – where growth stocks make up a larger share of holdings – are benefiting from a flood of inflows.

“Crucially they are also benefiting from a huge marketing push by the fund management industry in favour of ESG funds, partly in response to very strong investor demand for ESG products and partly because they offer better margins for managers. Indeed, because ESG funds tend to be actively managed, they are also the one area of real strength for active equity funds, which are otherwise suffering at the expense of their passive counterparts,” he said.

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