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UK-focused equity fund outflows surge in May

UK-focused equity fund outflows surge in May
Paloma Kubiak
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Paloma Kubiak

The recent UK market rally saw investors pull more than £1bn of profit from UK-focused funds – the worst net selling from the sector since June 2022.

This is the second-highest outflow on record (£1.1bn), according to global fund network Calastone.

It said actively managed funds were hardest hit, shedding £792m.

Overall, fund inflows dropped sharply in May, falling to £775m, which is their lowest level since November 2023 and two-thirds lower than the “red-hot” January to April average.

Calastone noted that equity funds made a very strong start to 2024, with the £8.9bn of inflows being the best start to any year on its record, before momentum slowed.

However, the network said that while inflows more than halved month-on-month, May was still a good month by the standards of the last three years, “but marks a distinct cooling of investor enthusiasm”.

Investors also cooled on North American equity funds, after they peaked in February. Here they added a net £826m to their holdings in May, down two-thirds since the peak. “Even so, May’s inflow was six times the long-run average, indicating investors are still positive about the US market. Moreover, each of the last six months has been one of the six best months of inflows for US equities,” Calastone noted.

Global and European funds

Global funds maintained their momentum in May, adding £1.44bn, the fifth-best month for this fund sector.

Meanwhile, European equities attracted £462m during the month, but investors withdrew capital from fixed income funds for the first time since October 2023.

Calastone explained that bond yields by the end of May remained close to the highest levels seen all year. Investors sold down a net £643m of their fixed-income holdings, the worst month for the asset class since March 2020, when the pandemic hit.

Amid rising bond yields and volatile stock markets, interest in safe-haven money-market funds were re-ignited in May too. After April saw the first month of outflows in more than a year, £134m of capital returned to money-market funds in May.

“Higher market interest rates make money markets an enticing prospect as a place to park capital at low risk for the short term”, Calastone explained.

Multi-asset fund outflows and ESG inflows

Elsewhere, mixed asset funds suffered outflows of £531m in May after ISA season had briefly turned investors more positive on the asset class.

Overall, mixed asset funds have seen outflows in 12 of the last 13 months, totalling a net £7.9bn.

Turning to ESG, these equity funds enjoyed their fifth consecutive month of inflows in May after an extended period of net selling during 2023. But Calastone said buying momentum is fading.

“Inflows have fallen every month since the January uptick and totalled £581m in May, with most of this inflow focused on ESG North American equities.”

Edward Glyn, head of global markets at Calastone, said: “We often see fund inflows subside from mid-April after the ISA season is over, but this year the fall has been more pronounced than usual.

“The UK stock market’s recent record highs are welcome news for UK investors who remain structurally overweight their domestic market, even following 36 consecutive months of outflows totalling £22.4bn. While buoyant markets usually attract new capital, many investors have seemingly chosen the UK rally as an opportunity to jump ship rather than a moment to reappraise the UK’s prospects.”

He added that the general election announcement “made no difference to selling patterns during the month”.

“This is a long-term trend of selling, not a news-driven flurry,” Glyn added.

Related: The UK is a ‘no-brainer’: Why we’re bullish on UK equities