ESG equities continued to record outflows while investors turned their attention to safe-haven money markets in October, according to the latest monthly fund flow index.
In the latest snapshot of investor behaviour, ESG equity funds recorded their second worst month on record with outflows totalling £700m.
This now means the sector has seen six consecutive months of selling in a “clear trend away from its three-and-a-half-year boom”, according to global fund network Calastone.
Soaring market interest rates put further pressure on asset prices, with Calastone revealing the largest outflows from equity funds in over a year – £1.2bn in October. This means there has now been six consecutive months of net selling. It is also the largest since September 2022’s Mini Budget (-£2.4bn) and year-to-date, the sector has shed £2.88bn of capital.
There has also been record selling of mixed asset funds and ongoing withdrawals from property funds.
UK funds hard hit
UK-focused equity funds were hit the hardest with £739m of outflows – the highest since April. Equity income funds were also hit hard with £475m of outflows, meaning the sector has now suffered 16 months in a row of net selling.
Elsewhere, European equity funds recorded their worst month of the year with outflows of £318m, as did the specialist sector (-£275m), with funds investing in infrastructure accounting for almost a third of withdrawals.
Fixed income outflows fell to -£79m but investors were steady in their buying and selling moves, particularly on 23 October when the US 10 Year Treasury yield surged by one sixth which pushed bond prices down.
Edward Glyn, head of global markets at Calastone, said: “The bond-market crunch has brought a deepening sense of crisis to capital markets, even though the real economy has held up relatively well in the face of higher interest rates and tighter credit conditions. Investors are no longer only fretting about persistent inflation but now increasingly fear unsustainable fiscal deficits in the US, the UK and much of Europe. The higher risk premium they demand in compensation is pushing bond yields up and prices down. And when longer-term market interest rates rise like this, asset prices of all kinds come under pressure.
“Some investors clearly judge that the bond market has fallen too far – willing bond buyers are hovering in the wings trying to snap up bargains. If the global economy falls into recession, they are likely to make strong capital gains as well as locking into high yields. That’s a tempting prospect, but those who dipped their toes in earlier in the year on this same premise are already nursing losses. Timing is notoriously difficult.”
Meanwhile, mixed asset funds saw record outflows of £1.57bn, soaring 50% on a month-on-month basis.
Calastone said 2023 is “likely to be the first year in Calastone’s data history that the sector sees net outflows”.
Where are investors biting?
Investors ploughed £586m of new capital into money market funds in October, which is the third best month for the sector on Calastone’s record.
Meanwhile, global funds and emerging market funds have continued to entice new capital, with £311m added to the latter in the month. Given the figures, EMs are on track to have its best year on record, if November and December stem significant net selling.
Glyn added: “Equity fund outflows are inevitable when bond markets are experiencing this wrenching repricing. But what about income funds, which are lower risk than high growth propositions? Despite dividend income in the UK and around the world looking healthy, income funds are suffering by comparison to the interest income investors can earn on bonds, money markets and cash. The valuation of dividend stocks is actually less sensitive to bond yields than high growth companies, but investors looking for income now have alternatives that come with lower risk. Similar factors are at play in closed-ended funds – income-focused investment trusts have seen discounts widen significantly recently.
“Record outflows from mixed asset funds reflect a growing investor perception that their strong record for a favourable balance of risk and rewards is breaking down as asset markets become increasingly correlated.”
