Fixed income funds experienced their best month in inflows in three years in May, as surging bond yields caught cautious investors’ eyes, according to the latest Calastone Fund Flow Index.
Investors added a net £877m to fixed income funds in May, a sharp turnaround compared to April, when more than £200m was pulled from the asset class. This marks the sixth best month for bond funds in Calastone’s record.
This was a month of surging bond yields as geopolitical and domestic instability hit markets in the UK, the US and Japan.
Edward Glyn, head of global markets at Calastone, said: “Bond markets bottomed out in the middle of the month as yields touched highs last seen before the global financial crisis.
“This offered an enticing opportunity to switch out of safe-haven money market funds whose returns mirror central bank policy rates and to lock into those multi-year high yields for the longer term.”
However, arguably the biggest winner of the month was multi-asset, which added a net £2.72bn, continuing the asset class’s streak of strong returns. This is the second-best monthly inflow for the sector on record, after the top performance in April where it added £3.32bn.
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Glyn added: “Significant outflows from cash funds with strong inflows into both fixed income and multi-asset funds indicate that investors were ready to redeploy capital, but many chose diversification over concentration, favouring strategies that balance income, resilience, and flexibility.”
Indeed, it was a poor month for money market funds, as investors removed £669m from the asset class in May. This continues the asset class’s underperformance; in April, investors dumped £617m from money market funds.
The reduced risk appetite and push for caution was visible in the flows into equity funds, which were down overall for the month compared to their April rebound.
Global equity strategies were up just £51m and have added “almost no net new capital in the past 12 months”, according to Calastone.
Emerging market, European and Asian equity funds all shed more than £200m in the month, despite regions such as emerging markets delivering strong total returns so far this year (MSCI Emerging Markets up 28.4% year to date).
US equity funds were once again the most popular of the batch after a strong run in April, attracting £238m as the stockmarket benefitted from another month of AI optimism and positive earnings from big tech.
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The UK was an unexpected winner, with inflows of more than £247m in May, the sector’s first positive month since November 2024, which was largely just a readjustment post-Budget outflows, according to the report.
Glyn added: “The inflow to UK equity funds is encouraging and may indicate sentiment towards domestic assets is becoming less negative, but it was narrowly focused; therefore it’s too soon to call it a broader trend.”
Passive funds continued to trounce their actively managed counterparts, though perhaps by less extreme numbers than we saw in previous months. Roughly £1.39bn was pulled from active equity funds, while about £1.14bn was added to passive counterparts, compared to April, when £2.6bn surged into passives.
“Overall, May looked less like a return to risk and more like a carefully managed re-entry into markets,” Glyn concluded.
