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Investor risk appetite on the rise but UK funds left out in the cold

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For the first time in a year, investors have switched from funds with lower risk ratings to those in higher risk categories as they “charged back” into equity funds in April.

More than £1.4bn (net) flowed back into equity funds in April, the largest intake since May 2021.

Global funds attracted the most new cash (£1.58bn) which is one of the highest in record, according to the data from global fund network Calastone.

It revealed that investors also plumped for emerging markets, with net inflows of £364m recorded in the month of April. This is the third highest on record, following a previous high just last month.

Edward Glyn, head of global markets at Calastone said: “Emerging markets hold a number of attractions at present. They tend to benefit when the dollar weakens; valuations are low relative to developed-market counterparts; investors are under-allocated to them; and the rate-tightening cycle is ending sooner in emerging countries that took swifter action against inflation.”

Despite “cracks” in the US banking system, North American equities enjoyed inflows of £253m, stemming the more than £2bn of outflows recorded in the previous nine months.

In tandem, inflows of capital to specialist technology funds was evident for the first time since August 2022.

European fund outflows while UK ignored

Meanwhile, outflows from European equity funds shrank to their lowest level since March 2022.

But closer to home, UK investors continued to shun UK-focused funds, with outflows accelerating in April, Calastone noted. In April, outflows notched up to £782m as this region has now suffered 23 months in a row of net selling.

In total, investors have dumped £13.86bn from their portfolios since June 2021. And, “the big switch out of UK funds has been matched almost exactly by buying of internationally-focused equity funds over the same period”, (£13.93bn) Calastone said.

Elsewhere, inflows to ESG funds have fallen below traditional funds as it absorbed £583m, more than double March’s £218m, but a long way off the £1.3bn recorded in Q1 2022.

The move into the new financial year also saw trading volumes fall by a fifth in April, following a high March turnover as investors looked to take their gains.

Calastone revealed the total value of buy orders plus sell orders (known as turnover) fell 19.5% month-on-month from £24.9bn to £20bn.

“In March, investors were rushing to use up their capital gains tax allowance as this has now halved for the new tax year and this drove turnover up”, Glyn noted.

‘Optimism is rather fragile’

Glyn said: “Capital markets largely traded sideways in April after a strong March – yet fund flows show risk appetite is on the rise. Inflows to equity funds have surged as a result. Global funds are typically the first go-to for new cash. Meanwhile, the sharp turnaround in interest in North American and specialist tech funds reflects the strong response of growth-company share prices to falling long-term bond rates.”

However, he warned the horizon is not “unclouded”.

“Company profits are under pressure and there remains a lot of uncertainty over the likelihood and severity of any potential economic downturn. The resurgent optimism is therefore rather fragile. Indeed, markets plunged at the beginning of May as US banking failures continued.”

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