US equities see continued inflows as UK investors 'switched again'

Calastone’s latest Fund Flow Index for February saw US equities see continued inflows in February as UK investors switched again from unloved UK funds.

After running for cover during January’s financial market turbulence, UK investors were more positive in February. They added a net £1.09bn to their equity-fund holdings during the month, having been net sellers in January.

Rising bond markets also prompted the largest inflows to fixed income funds since June 2023, making February the third best month on Calastone’s 10-year record for the sector.

Equity fund inflows reached £1.09bn after outflows in January – calmer markets encouraged cautious buying.

UK-focused funds saw accelerating outflows - £1.22bn left the sector, the sixth worst month on record.

Global and North American funds scooped strong inflows – reflecting a US focus by investors.

Bond-market turbulence pushed yields to pre-global financial crisis (GFC) levels in January – tempting investors to buy in bulk - bond fund net inflows were the third highest on record in February.

Edward Glyn, head of global markets at Calastone said: “February’s global equities marched investors to record heights and then marched them back down again, leaving them nursing losses for the month. Investors were clearly wary – inflows to equity funds were around half the monthly average for the last year.

"The fact that the UK stock market bucked the trend was seemingly immaterial to investors clearly bent on switching steadily out of domestically focused funds. UK investors are still structurally overweight on UK equities relative to the UK’s share of global market capitalisation, but the relentless purchase of global and North American funds is only increasing their exposure to the US market, and in particular its Magnificent 7 stocks. This is not without risk, as the volatility in share prices of these big tech stocks in recent months shows.”

“The surge in interest in bond markets was clearly spurred on by the buying opportunity presented by the exceptionally high yields on offer in January. Bond markets have calmed considerably since then, but investors who bought when yields peaked are already sitting on capital gains and have locked in at very attractive prices. If inflation once again slips its chains and makes another run for it, this rally could prove short-lived.”