UK investors piled into equity funds in February – adding £2.66bn to their holdings – following a “punishing” 18 months where outflows of £8.6bn were recorded.
Inflows for the month were the best since May 2021 and have been climbing since November as investors bought into a strong stock market rally, according to the latest Fund Flow Index from global funds network Calastone.
Indeed, it said February’s intake was the best month on its nine-year record, with a total of £6.31bn added since November, as “risk is back on with a vengeance”.
However, investors have proved to be “very selective”, opting for North American equity funds (£2.54bn) as inflows here have broken records for the third consecutive month.
UK investors are also showing renewed interest in ESG, with American ESG funds absorbing £1.88bn, while £363m was added to European funds with this focus. Overall, inflows of £1.54bn into ESG funds were recorded in February, with this being the fourth-best month after January’s high.
Meanwhile, global equity funds also saw strong buying in February, though this was away from ESG labels.
Elsewhere, money market funds saw inflows of £78m, a slight increase on January’s intake, but “well below” the £400m monthly average during 2023, Calastone noted.
It added that money market funds were in demand as investors sought a safe, high-yielding home for their cash. This in turn saw deposits into fixed income funds grow as it attracted £329m of new cash, with February being the best month since June 2023.
However, mixed asset funds remain out of favour, as property funds continue to suffer “structural outflows”.
Asia-Pacific funds also recorded their third-worst month as they shed £229m, while UK investors continued to shy away from home-focused funds, withdrawing £633m in the month.
‘Investors go cold on safe havens’
Edward Glyn, head of global markets at Calastone, said “risk is back on with a vengeance” as investors go cold on safe havens, choosing to jump back into equities “feet first”.
Glyn said: “The US stock market has soared by a fifth since late October, driving accelerating fund inflows ever since. The rally has been driven by technology stocks in particular. These are heavily represented in ESG funds, which may help explain why we are seeing such a surge of interest in US funds in this category. A rising tide is not lifting all boats, however. The UK stock market has notched a touch higher over the same period, but nothing can persuade UK investors to add capital to their home market, despite very low comparative valuations. Meanwhile, Asia-Pacific remains stuck in China’s doom loop.”
He added that the equity bull market “seems to have ignored developments in the bond markets”.
“Fears both that inflation may prove too sticky and that spendthrift Governments simply haven’t got the will to curb their deficits have pushed yields back up in recent weeks – and bond prices therefore down. These higher yields are bad for equity valuations, but they haven’t touched the sides of the bull run. For their part, bond investors are adding modestly to their fund holdings – locking into today’s higher yields and hoping for capital gains if and when the market rallies,” he said.
