The strong recovery in global markets in November tempted UK investors back in, but confidence remained fragile, leading to a ‘selective approach’ for holdings.
Investors favoured safe-haven money markets, according to the latest Fund Flow Index from global funds network Calastone.
This category absorbed a net inflow of £525m – more than twice the sum ploughed into fixed income funds in November.
Year-to-date, money markets have absorbed £4.09bn of cash, bigger than the £3.49bn accumulated over the last eight years combined.
As equity funds were buoyed with £449m of inflows – a tenth of the net £4.54bn total that had been withdrawn between May and October, investors also plumped a record £414m to emerging market funds. Calastone noted investors have been net buyers for 14 months in a row now.
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Meanwhile, £481m of new capital made its way into North American equity funds as investors were lured in by US’ rapid GDP growth and falling inflation. This is also their best month since June 2022, and sixth best on Calastone’s record.
Global funds attracted £802m, while Japanese funds saw inflows of £111m, equating to £9 out of £10 of the net cash flowing into specialist regional funds.
UK-focused funds and ESG continue to record outflows
However, outflows from Asia-Pacific funds accelerated to their second highest level on record at £229m in the month. Sector funds had their worst ever month of outflows at £296m, with the main contributor coming from infrastructure funds.
Outflows continued in European equities, income funds and UK-focused equities, with the latter recording £330m which was “their best reading since March 2023” as outflows declined, but it meant overall, the sector has had 30 consecutive months of outflows.
With COP28 in Dubai, Calastone said “investors appear increasingly sceptical about ESG funds”.
ESG equity funds suffered their seventh consecutive month of outflows in November, with investors withdrawing £524m of capital. Since outflows began in May, the total withdrawn from the sector comes in at £3.66bn, with the biggest outflows from ESG funds focused on North America, followed by UK-focused funds.
However, ESG funds investing in emerging markets have continued to attract inflows this year while ESG fixed income funds have seen outflows for nine months in a row as a net £483m has been withdrawn from the sector.
Elsewhere, mixed asset funds suffered a record outflow of £1.59bn, reflecting investor scepticism over their ability to offer a superior risk/reward profile while bond and equity markets are moving in tandem. Outflows from property funds rose again, reaching £88m.
‘It’s clear investors are very cautious’
Edward Glyn, head of global markets at Calastone said: “The surge in interest in Japanese equity funds reflects the flurry of excitement that Japan may finally be shrugging off its long stagnation. Regions like Europe, Asia and the UK, which are suffering a weaker outlook remain out of favour.
“It’s clear investors are very cautious. There is a lot of concern that higher interest rates have not yet taken their full effect to suppress demand, which would impact company profits and therefore share prices. And of course, the returns on low-risk cash-focused money market funds are now better than at any time since the GFC, providing an attractive alternative magnet for nervous investors – with inflation falling, these returns are even turning positive in real terms now too.”
Glyn added: “The FCA is now taking action to counter allegations of greenwashing in the ESG sector, but investors are way ahead of them – they have been voting with their feet for seven months now by selling down ESG funds. The FCA’s action is likely to cast a further pall over the sector in the months ahead, however, and we will be monitoring the extent to which fund flows react.”
