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ESG funds record second-worst month of inflows in three years

Paloma Kubiak
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Paloma Kubiak

The ESG ‘gold rush’ appears to have peaked as funds in this sector had their second-worst month in March since October 2019, data from a global network reveals.

ESG funds absorbed just £218m in the month, which is two-thirds less than the monthly average over the last three years.

According to data from global fund network Calastone, fund flows for ESG and non-ESG equities has converged again for the first time since 2019.

ESG funds have notched up inflows of £24.1bn since 2015, but most of this has come since 2019 and represents more than half of all equity inflows over the last eight years.

Equity funds

Meanwhile, the recent bank failures have failed to dampen investor appetite as equity funds enjoyed net £960m inflows, reversing a run of investor pessimism and the best month for equity funds since December 2021.

March marked a significant turnaround from outflows seen in January and February. By comparison, just shy of £200m flowed into equity funds over the whole of Q1.

And investor confidence also buoyed global funds, with these gaining £1.69bn of new capital, the best month since November 2021. Calastone noted this was also the third best figure on record.

Meanwhile, UK-focused equities continues to be dumped by investors, but “the rapid tide of outflows was somewhat slacker in March than in recent months”, Calastone said.

Here. investors pulled a net £747m out of their UK-focused equity fund holdings, down from an average monthly outflow of £888m between November and February.

Overall, UK-focused equity funds have suffered outflows for 22 consecutive months.

‘Rebalancing holdings away from the UK’

Edward Glyn head of global markets at Calastone, said: “Global funds are the largest category of funds under management in the UK. They overtook UK equities as the largest sector for UK investors back in December 2020. Since that time, Calastone’s figures show net inflows of £23bn to the sector, while UK equities have suffered outflows of £12.1bn.”

Glyn added: “The relatively strong performance of UK equities since the bear market began just over a year ago has not improved sentiment. If anything, we have seen outflows accelerate, which on the face of it seems surprising. Yet the large share of UK-focused funds in investor portfolios makes them an obvious source of cash for those keen to reduce overall equity exposure, while the increasing perception of the London stock market as an investment backwater, along with the political and economic difficulties the country has been facing, have kept the pressure on to rebalance holdings away from UK shares.”

Emerging markets, passives and fixed income

Emerging markets recorded £393m of inflows – the best since autumn 2021, after notching up £294m in February.

But European funds remained out of favour, with UK investors selling a net £238m in March, as they record outflows over the last 15 months.

Meanwhile, index-tracking funds absorbed £909m, compared to £51m to active funds. Calastone said this is “easily the best month for passive funds since April 2021”, marking the first inflow to passive funds in more than a year.

Glyn said: “The March turnaround for index tracking funds is a clear sign of improved investor sentiment. Between January 2022 and February 2023, investors sold £4.8bn of their passive fund holdings, but only £2.2bn of their active ones. Trackers bore the brunt of the big asset allocation switch out of equities in the bear market, with the expectation that active fund managers can better position funds defensively, while trackers just ride the market. Hopes, perhaps premature, that the worst is now behind us, caused a partial reversal of that pattern in March.”

Elsewhere, fixed income funds also continued to attract investor attention, though at a slightly slower rate than in recent months.

Here investors added a net £683m in March, still above average, “reflecting hopes of capital gains if policy rates are near their peak and market interest rates fall further”. Over the whole of the first quarter, £2.75bn flowed into fixed income funds, making it the best quarter on Calastone’s record.