The latest monthly Calastone Fund Flow Index (FFI), which measures UK investor sentiment, highlights a record level of inflows into equity funds over the first half of 2024, with continued appetite for North American and global funds.
Calastone, which connects funds with markets and can track transactions throught its network, says that on an aggregated basis investors added a net £11.39bn to their holdings over the period, the best six months for equity funds on Calastone’s ten-year record.
"In the first half of the year, North American and global funds absorbed £7.80bn and £7.58bn respectively, though this was offset by a £3.75bn outflow from UK focused funds. European and emerging market funds also did well, while income funds suffered outflows," the company said in a comment on the trend.
"Global equity funds were June’s most popular category, scooping up a net £1.36bn, while European equities absorbed a net £714m. Elsewhere, emerging markets saw inflows return after two months of net selling – investors added £269m in June, almost entirely favouring global emerging market funds. The biggest change was in North America. After breaking a number of records already this year as investor cash poured into the sector at breakneck speed, inflows completely dried up in June. Investors withdrew £0.6m from North American equity funds during the month, despite the ongoing strong performance of the US equity market."
"Meanwhile, although the UK stock market dropped back from its record highs in May, net outflows actually slowed during the month. Investors cashed in £522m of their UK-focused equity fund holdings, making it the least bad month so far in 2024. Outflows slowed during the month too – the second half of June saw significantly less selling than the first half."
There was also relatively good news for ESG investors in the latest data.
"ESG funds had recently enjoyed their best few months since 2021 after a protracted spell of divestment – investors added £5.10bn between January and May thanks to strong buying of US ESG funds which are heavily weighted to the big technology names like Microsoft and Nvidia. In June, however, investors tipped into net selling of ESG funds for the first time since December, withdrawing £179m of cash from the sector. The evaporation of interest in US ESG funds in June meant ongoing outflows from UK-focused ESG funds in particular made the most negative contribution and helped pull the overall figure into net selling."
The interest in equities may have come at the expense of bond funds, which saw outflows, according to Calastone. This is also linked to expectations around rate cuts, which has impacted bond yields over the past month of June.
"This brought capital gains for bond investors and would have pleased those that locked into the high yields available between the end of April and the end of May. Nevertheless, investors withdrew capital from bond funds for the second month in a row, pulling £471m from their holdings in June, and taking the two-month total to £1.11bn."
"Property funds continued to shed investor capital – a net £48m left the sector in June. Meanwhile, money-market funds are once again attracting significant inflows, despite the probability of interest rate cuts on the horizon. Investors added £247m in June - April 2024 was the only month since January 2023 to see outflows."
Edward Glyn, head of global markets at Calastone, said: "All eyes are trained on the world’s central banks, looking for signals that long-awaited rate cuts from the Fed and the Bank of England will follow those like the ECB, Swiss National Bank and the Bank of Canada which have already begun to bring the price of money down."
"Hopes for cheaper money after the painful rate squeeze of the last two-and-a-half years are the clear driver of record flows into equity funds so far this year. The US market valuation is not cheap, however, and this means investors are hoping that earnings growth will deliver, as the prospect for multiples to expand further is surely limited at present. By contrast, large markets such as the UK and Europe are trading on less challenging valuations, while many emerging markets are set to benefit from the weaker dollar and a nascent commodity boom."
"The outflows from fixed income funds in the last two months are harder to understand. If investors truly believe rates are coming down and will stay low, then there are capital gains to be made in the bond markets. Perhaps the allure of equities simply looks too strong at present. Moreover, since the beginning of 2022, bond funds have seen inflows more than twice as large as equity funds (£8.3bn v £4.0bn), so the current picture may simply reflect a rebalancing of investor appetite."
