Appetite for UK equities slows in May as resurgent Covid fears dent enthusiasm

Flows into UK-focused equity funds halved from £303m in April to £147m in May

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Flows into UK equities waned in May as resurgent Covid fears muted enthusiasm, while emerging markets saw the second-highest inflow on record, according to data from Calastone.

Fears of new variants and ensuing delays to lockdown easing in the UK slowed flows into UK-focused equity funds. Flows halved from the previous month, recording £147m in May, compared to £303m in April.

Though the asset class saw positive net flows at the start of the month, from 11 May onwards flows dipped into negative territory as infection levels accelerated.

Edward Glyn, head of global markets at Calastone, said: “A lot of hope has been baked into UK-focused equity funds since the end of January as the rapid vaccine rollout raised hopes of release from Covid restrictions. Certainly the economic data from purchasing manager tracking, economic growth and retail footfall is extremely encouraging, even if the infection numbers are going in the wrong direction.”

He added: “Whether the outflows that began in mid-May can be reversed will depend entirely on whether the government presses ahead on 21st June.”

Investors optimistic about EM and global equities

But May was a good month for emerging markets, which took in £256m. This was its second highest inflow on record and worth roughly one percent of the segment’s funds under management in a single month.

Glyn said: “Strong prices for commodities, a weak US dollar, rising demand in developed economies and improving global trade are all good for emerging markets and this is spurring confidence among investors, even if many emerging markets are still in the worst phase of the pandemic.”

Glyn said the same optimism was fuelling global equity funds which attracted the highest amount of cash by value at £1.3bn.

Meanwhile European funds continued to be out of favour, recording just £31m of inflows, “a rounding error in the context of £1.7bn combined buy and sell orders,” the report said.

Overall, inflows into equity funds reached £2.2bn, their eighth best in any month on Calastone’s record and more than twice the monthly average over the last year. May’s flows were significantly lower than the £3bn poured into equity funds in April.

See also: Equity funds record highest month of net inflows since 2015

Elsewhere, inflows into active funds of £1.6bn were almost three times as large as those into passive vehicles (£580m). Active funds have now beaten their passive rivals in six of the last seven months.

While Calastone noted ESG funds have been a key contributor to the active success story, for the last two months they haven’t been the main driver behind the explosion in flows.

In May active ESG funds brought in £680m but other active funds accounted for the remaining £930m with conventional global funds, emerging market and North American funds hoovering up the most cash.

Property funds suffer second largest outflows on record

Property funds suffered the second-largest outflows on Calastone’s record, as investors redeemed a net £445m of their holdings. Sell orders outweighed buy orders five to one by value during the period.

Portfolio Adviser reported earlier this week that the M&G Property Portfolio suffered over £800m in redemptions when it re-opened its doors in May.

Fixed income income saw net flows of £662m, the slowest since October 2020 but still higher than the long run average. Calastone found that index-linked income funds saw a second consecutive month in which buying activity was disproportionately large compared to the wider fixed income category.

Glyn said: “Index-linked bonds protect investors from inflation, so the disproportionate interest in funds that specialise in this asset class is a sign that some investors are wary of rising prices. They will need to be careful. If interest rates need to rise more sharply than is expected, index-linked bonds will fall in value, offsetting their inflation protection.”

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