Profit taking after the UK market’s recent rally prompted a £1.1bn net outflow from UK-focused funds in May, according to Calastone’s latest Fund Flows Index.
The withdrawals marked the worst month of net selling for the sector since June 2022, and the second worst on Calastone’s record. £792m came from actively-managed strategies.
Edward Glyn, head of global markets at Calastone, said: “The UK stock market’s recent record highs are welcome news for UK investors who remain structurally overweight their domestic market, even following 36 consecutive months of outflows totalling £22.4bn.
“While buoyant markets usually attract new capital, many investors have seemingly chosen the UK rally as an opportunity to jump ship rather than a moment to reappraise the UK’s prospects. The election announcement made no difference to selling patterns during the month – this is a long-term trend of selling, not a news-driven flurry.”
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Equity funds momentum slowed as a whole in the month, with inflows falling to £665m. According to Calastone, this was two thirds lower than the January to April average, primarily caused by lower inflows to North American funds coupled with the higher outflows from UK-focused funds.
Global funds, however, maintained their momentum adding a net £1.44bn. It marked the fifth-best month for the fund sector. European equities also attracted net inflows, totalling £462m during the month.
After a more positive month for flows in April, mixed asset funds suffered net outflows of £531m in May. The sector has now seen outflows in 12 of the last 13 months, totalling a net £7.9bn.
Fixed income
Fixed income strategies were also hit by redemptions, as investors sold a net £643m in the worst month for the asset class since March 2020.
However, investors placed their cash back into money market funds, with the asset class attracting £134m inflows in the month.
While flows are often down the month following the end of the ISA season, Calastone’s Glyn said the fall this year has been more pronounced than usual.
“The prospect of interest rate cuts in the US and the UK has receded yet again, with only the ECB likely to move in the short term. Bond yields are approaching once more the post-GFC highs they reached in late 2023, pushing down bond prices as they have climbed.
“If you are confident rates will fall, then it’s possible to lock into these high yields for a very long time through fixed income funds, but the see-saw of hopes and fears over rates has finally led some investors to call time and withdraw capital for the first time in months, choosing instead to take refuge in cash or money markets.
“The same forces explain why bond-rich mixed asset funds are suffering outflows and why equity fund inflows slowed in May. The bond markets hold the key to equity valuations over time, but equity fund flows and stock markets are proving remarkably resistant to the tough conditions in the bond markets. Inflows have slowed, but equity investors have largely held their nerve.”
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