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Property fund outflows fall to lowest level in four years

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Property funds, which are commonly viewed as an inflation hedge, recorded the lowest level of outflows in nearly four years.

Outflows from property funds in May fell to their lowest level since they first turned negative in October 2018 (disregarding property fund suspensions in 2020).

Net redemptions shrank to just £8.1m – eight times less than the April figure of £64.6m, according to the latest fund flow index from global fund network Calastone.

It is also 52 times less than in May 2021, when outflows equalled £415m. Further, it noted that in the last few days of May, the outflows actually turned into inflows.

Calastone said overall, most of the decline was driven by a reduction in selling activity, but it also noted a “marked increase” in buying interest too – up almost a fifth compared to the average over the last year.

Gross buy orders rose to £127m, up from £82m just two months ago and comes at a time when investors have grown wary of many other asset classes “which places the property fund flow figures into an increasingly favourable light”.

Further, Calastone said this could indicate that investors are recognising the inflation protection that property can often provide.

Property funds at a turning point?

Edward Glyn, head of global markets at Calastone, said: “Property is often considered a partial hedge against inflation, because rents tend to keep up with general price levels in the economy – at least over the medium term.

“There has certainly been a shake-out of sellers from the sector – investors have pulled £6.6bn out of the sector since flows turned negative almost four years ago which means there is a natural brake on outflows now.

“But we may finally be at a turning point. Until recently it has been hard to find days when property funds have seen inflows, let alone whole weeks. Other asset classes feel much riskier as rate rises, higher inflation and a faltering economy pose real cause for concern. Bricks and mortar may come to be viewed as a safer haven once again.”

UK-focused equity funds pummelled in May

Elsewhere, Calastone revealed May saw net outflows of £826m for UK-focused equity funds which means the sector has recorded the worst three months on record, and these all sit within 2022 alone.

And outflows from UK-focused funds are now in their 12th consecutive month which is longer than for any other segment of the market. Last month, the sector recorded outflows of £836m.

Meanwhile, European equity funds had their worst month of the year, shedding a net £389m, while Asia-Pacific and regional funds also saw significant net selling. Global funds were the only geographical category to see significant inflows (£659m), of which £8 in every £10 was devoted to ESG strategies.

Calastone said that equity income funds are also in favour as they garnered their second consecutive month of inflows in May “after years of unbroken outflows”, as a net £36m in new cash was added.

Collectively, equity funds shed £310m of capital in May, taking the net outflow year-to-date to £877m. This is the worst start to a year on the Calastone index’s eight-year record and contrasts sharply to net investment of £9bn in the first five months of 2021.

It also said the contrast between ‘regular’ equity funds and their ESG counterparts is “stark”. The former has seen outflows of £3.7bn this year, the latter inflows of £2.8bn – suggesting a significant element of “cannibalisation”.

Glyn added: “It’s relatively unusual for equity funds overall to see outflows. There is instead an in-built bias towards net investment simply because British investors steadily put away a portion of their incomes each month. Equity funds are facing a double squeeze at present however. On the one hand conditions in equity markets are unfavourable – volatility is high and riskier segments have seen very large price falls this year: fear of losses is deterring investors from adding new capital.

“On the other, the squeeze on household incomes is growing, encouraging people to keep back more of their earnings as a cash cushion. Bank of England figures show household cash balances grew by £13.5bn in April alone, the highest figure since lockdowns were in force and there was very little to spend money on.”

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