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Investors flee ‘safe haven’ bond funds

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UK investors pulled record amounts of money out of funds last month as the coronavirus crisis pummelled global markets.

In total £3.1bn flowed out of funds in March, almost exactly three times the previous worst month – June 2016 – when the UK voted to leave the EU, according to fund technology firm, Calastone.

However, the figures revealed some surprising trends.

The big story was the exodus from bond funds, which are generally considered less risky than equities.

By the end of March, investors had pulled £3.7bn from bond or fixed income funds, thirteen times more than in January 2019, the previous worst month.

Investors reacted to the risks that weak sovereign borrowers and corporates with overstretched balance sheets may find their debts unsustainable.

Equity fund outflows, however, were “astonishingly small” for a month of such market turmoil, with just £244m flowing out.

Calastone did note that investor reaction has been “enormously varied” as “different flavours of equity fund have experienced very different flows”.

Most notably, passive funds saw strong inflows, totalling a record £1.4bn, while active funds suffered their second-worst month on record, shedding £1.7bn.

By the same token, European equity funds suffered their second worst outflow on record, losing £500m but funds focused on UK equities had their second-best month in four years, attracting £508m of new capital.

Edward Glyn, head of global market at Calastone, said: “Market crises are superficially all the same as volatility soars and asset prices collapse, but they differ enormously in the detail.

“The temporary loss of fixed income as a safe-haven asset class to counterbalance some of the huge losses in equity markets left investors with little option but to ride it out or park their money in cash or cash-equivalents like money market funds. Equally the courage of investors not to dump their equity holdings is surprising.

“The COVID-19 crisis has undoubtedly had a bigger impact than the EU Referendum shock, yet so far equity funds are weathering the storm rather well. However long this crisis lasts and whatever other twists and turns it has in store, it has one thing in common with all the others. It will pass.”

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