Equity index funds are back in fashion after lagging behind their active counterparts over the past two years. In September alone, passives notched up £1.1bn of inflows.
The inflows were mainly driven towards global index funds, while investors dumped active funds to the tune of £1.3bn in September – their worst month in a year.
Year-to-date inflows to passive funds stand at £5.35bn which is in stark contrast to the £7.03bn outflows from active ones, according to data from global fund network Calastone,
Active fund outflows are most severe in the UK, Income, North American, European and ESG funds, both last month and over the year.
Indeed, ESG funds suffered a fifth consecutive month of outflows in what is now a “clearly emerging trend”. Investors redeemed £485m from their ESG equity holdings, almost half of which came from North American ESG funds.
Equity funds also recorded a fifth consecutive month of outflows as the volatile bond markets “forced reappraisal of stock valuations,” Calastone noted. September saw £206m pulled but this was the “least severe” since February this year.
Elsewhere, investors continue to shun UK-focused funds with redemptions of £448m in September which marks the 28th consecutive month of outflows.
US funds are also seeing more selling pressure with a net £285m withdrawn from the North American fund sector.
Income, bond and mixed asset funds all out of favour
Income funds also suffered significant outflows, shedding £594m, their second-worst reading of the year after August.
Bond funds also shed £128m while mixed asset funds suffered their worst month on record, with Calastone suggesting the risk/reward profile is “no longer attractive”. Here, £1.04bn was dumped.
After five months of net selling, this was the longest run of outflows from the sector that the network has witnessed.
In the seven years to 2021, Calastone said it had only recorded three months of outflows from mixed asset funds. But since the beginning of 2022, the sector has seen net selling in 11 months, five from May alone.
Edward Glyn, head of global markets at Calastone, said: “The objective with mixed asset funds is to exploit the traditional inverse correlation between equities and bonds to generate better risk-adjusted returns.
“The trouble is that bond and equity markets have moved largely in tandem in the last eighteen months or so which is leading investors to question whether they can do better elsewhere for a similar risk profile.
“This reappraisal is clearly driving investors out the door. Mixed asset funds used to enjoy steady inflows month in, month out, as investors had them cemented into savings plans, but this no longer seems to be the case.”
Investors turn to global and emerging market funds
Global funds attracted £981m of new capital in September, while emerging markets continued their best run on Calastone’s record. Investors added £284m in September, taking the year-to-date total to £2.39bn.
Safe-haven and high-yielding money market funds also continued to attract new capital – a net £189m in September.
Glyn added: “The distaste for UK equities is a structural trend that domestic and international investors are unwilling to break, despite attractive valuations, but outflows from North American funds only began in earnest with the bear market in 2022.
“Highly valued US equities, especially in the technology sector, are especially sensitive to rising bond yields – fund flows in and out of US equity funds have followed moves in the bond markets lately. Meanwhile, inflows to emerging markets in 2023 reflect attractive prices after very steep falls from their 2021 peak and accompany calmer emerging market bond yields this year.”
