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Investors lock into high yields as they ditch ESG funds

Paloma Kubiak
Written By:
Paloma Kubiak

Despite global stock prices continuing to climb, investors withdrew their capital and opted for fixed income instead while ESG funds suffered record outflows in July, according to a leading index.

UK investors are taking the higher share prices as an opportunity to withdraw capital from equity funds, as they sold a net £983m of holdings in the month of July.

This was the highest outflow figure since September 2022 in the aftermath of the disastrous mini-Budget.

According to data from global fund network Calastone, outflows have notched up £1.95bn over the past three months. At the same time, the MSCI World Index recorded +7.8% between 1 May and 31 July 2023.

UK equities saw outflows of £710m, representing over two years’ of net selling. North American equity funds were scaled back to the tune of £588m – the second highest on Calastone’s record.

Investors also trimmed their holdings in European, Asia Pacific and country funds too.

But notable selling in the ESG sector was recorded and now have suffered their third consecutive month of outflows – the longest run of selling.

July saw them shed a record £376m, with just over £1bn pulled since May.

Global equity funds, fixed income and emerging markets buck the trend

At the other end of the scale, emerging markets welcomed £305m of inflows, while global equity funds added £837m of new capital.

The boom in AI also helped the small tech fund sector with £61m cash added. Calastone noted this was the fourth consecutive month of inflows which stemmed the previous 15-month rally of outflows.

Outflows from equities, property (£66m) and mixed assets (£82m) have instead found their way into interest-bearing funds.

Fixed-income funds saw £347m of inflows in July, but this was less than half of June’s £880m due to July being a volatile month for bond yields. When bond yields fell (and prices rose) in the middle of the month, investors were briefly fixed income sellers. But buying re-emerged in the latter half of July as investors chose to lock in yields that were once again climbing towards their highs for the year.

Meanwhile, money market funds remained in favour amid the rising interest rate environment as £403m of inflows were recorded. Calastone noted that May, June and July 2023 are each among the five best months for money market fund inflows on its record. Inflows to money market funds over the last six months exceeded those from the previous four years combined.

Balancing act

Edward Glyn, head of global markets at Calastone said: “Inflation is still higher than bond yields in many parts of the world, especially the UK, so returns are still negative in real terms. But if and when inflation returns to target, locking in at today’s high bond yields for the medium to long term will offer significant benefits to those investors who have committed capital to fixed income funds. Meanwhile, money market funds offer even higher short-term returns while policy rates are still climbing and their low risk means capital values remain very stable should investors wish to switch back to higher-risk assets in future.

“For now, investors remain very risk averse, choosing the strong rally in global share prices as an opportunity to withdraw cash rather than bank on further gains. The return on a bond can be predicted with near certainty if it is held to maturity, depending on its credit rating, while equity markets are fraught with risk. With the outlook for global economic growth uncertain and corporate earnings estimates being revised down, attractive fixed income yields have tipped the balance for fund investors away from equities for the time being.”