During this year’s ISA season – the seven weeks to 5 April – investors ploughed a record £5.17bn into equity funds, but they were picky when it came to their holdings.
The inflows during this year’s ISA season represented more than five times as much as in 2023 (£981m), making it the best year on record, according to global fund network Calastone.
Its latest Fund Flow Index revealed that investors “shrugged off” faltering equity markets and the “sagging” bond market in April as they added to their holdings.
In the month of April, a net £1.93bn was allocated to equity funds, while £422m made it to fixed income funds.
However, Calastone noted that more than half the month’s inflows to equity and fixed income funds took place in the first five days of April, as investors banked leftover ISA allowances.
But investors were “choosy” when it came to their holdings, plumping for global, North America and Europe, while emerging markets and the UK were left out in the cold.
North American equities saw net inflows of £1.25bn – the fourth-best on record. Investor optimism saw £1.49bn added to global equities, while £471m was allocated to Europe.
Mixed asset funds also enjoyed their first month of inflows after eleven consecutive months of net selling.
However, the tide has turned on emerging markets, as investors broke an 18-month run of inflows as they sold a net £162m of holdings.
Calastone said the “relentless negativity” on UK-focused equity funds was “undiminished” despite the UK market reaching a record high.
It revealed outflows reached £665m, taking cumulative withdrawal of capital to £21.3bn in 35 consecutive months of selling.
Instead, investors continue to turn to index funds, which have been favoured for 16 consecutive months.
Here, equity index funds (namely North American and global funds) have absorbed £14.92bn of investor cash since January 2023. At the same time, active funds have shed £7.26bn.
By contrast, from the end of 2020 to 2022, active funds comfortably beat their passive counterparts, with inflows of £12.03bn versus £626m.
‘Another rough month for bond markets’
The benchmark US 10-year yield “rose relentlessly” during April, ending the month at 4.68%. This is up by half a percentage point since the end of March, “setting the tone for bond markets around the world”.
This is because rising yields push bond prices down. But, while investors are nursing losses on the £1.7bn of bond-fund purchases they made between November and March, they added a further £422m to their holdings, in line with the long-run average, Calastone noted.
Elsewhere, money market funds suffered £100m of outflows in April, which is the first month this asset class has seen net selling since January 2023.
Investors are pivoting from the safe-haven funds into riskier assets, while property funds also saw continued outflows.
Edward Glyn, head of global markets at Calastone, said: “The 2024 bull run in equity markets flies in the face of the uncomfortably bearish signals coming from the bond markets. Inflation in the US, the UK and elsewhere remains obstinately above target and resistant to high interest rates – meaning they are going to stay high for longer. That is bad for asset prices of all kinds, and global equity markets faltered in April, falling almost 4% from the peak.
“Nevertheless, they remain close to the record high reached earlier in the month, leaving some markets, particularly the US, looking expensive. Investors seem undeterred. Inflows may have slowed a touch, but they are still well above normal levels as investors chase stock prices – the outflow from money market funds is part of this trend. Meanwhile, inflows to bond markets show that steady and accumulating losses are not deterring new capital – this is not unreasonable, as there are substantial gains to be made when interest rate expectations turn a corner and high yields mean investors can lock in historically high income levels now for the long term.
“All this helps explain why ISA season has been so strong – our data shows it’s been the best on our nearly 10-year record. Asset managers are cheering huge inflows.”
