Calastone: UK investors pile into US equity funds in December

While 2023 flows as a whole belonged to money market strategies

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UK investors piled back into equity funds in December with inflows soaring to £1.2bn in the month, according to Calastone’s latest Fund Flow Index.

Equity inflows were at their highest monthly level since April, and the second-highest since August 2021. US equity funds enjoyed a record month, attracting a net £968m.

European equity strategies also posted their second-best ever month, adding £476m. Prior to December, the sector had recorded outflows in every month since January 2022.

See also: Loomis Sayles £1.1bn US Equity Leaders fund tops Bestinvest December buylist

December’s overall inflows could not prevent equity funds posting net outflows for the second consecutive year, as £1.2bn was withdrawn from the asset class.

This was driven by UK equity funds, which was the only geographical sector to suffer outflows in December, though the £418m pulled by investors was below the monthly average for the year.

UK equities suffered £8bn outflows as a whole in 2023. Discounting UK flows, equity funds attracted £6.8bn in the year.

Elsewhere, ESG funds recorded an eighth consecutive month of outflows as investors retrieved £54m. Overall in 2023, ESG strategies shed £2.4bn.

Multi-asset funds saw outflows fall to £466m in December, down from £1.6bn the previous month. However, 2023 was the first year on Calastone’s record to see net outflows from the asset class, with £4.8bn flowing out of the sector.

Property funds also fared badly with a fifth consecutive year of outflows, with 2023 as a whole seeing them shed £601m.

Record year for money markets

The year 2023 belonged to money market funds. Investors put a record £4.4bn into the asset class, which was more than in the previous eight years combined as investors sought to take advantage of higher interest rates.  

Edward Glyn, head of global markets at Calastone, said: “Money market funds are doing well for two reasons. First, they are a safe haven as they invest in very short-dated fixed income securities – such bonds redeem within weeks, so credit risk is minimal, and yields are high just now.

“Secondly, the yield on money market funds is often well above what is available for cash on deposit at a bank, so they are drawing money away from the banking sector that might otherwise have idled in instant access savings.”

Fixed income attracted £283m net inflows in December, with investors becoming increasingly certain the rate hiking cycle both sides of the Atlantic has now peaked.

Glyn added: “The bond markets are still firmly in the driving seat. After the bear market of 2022, investors started the year by trying to lock into high bond yields and the capital gains that would eventually flow from expected disinflation.

“Investors also piled into equities, banking on a rally. That all made sense at the time, but then bond markets detoured into extreme pessimism in the middle of the year over the feared inability of higher interest rates to quell inflation. Yields soared even higher – this put capital markets under strain since all asset valuations depend on bond yields, it turned the thumbscrews on government and company finances, and it damaged confidence in the economy.

“The last couple of months have seen a dramatic turnaround both in the markets and in fund flows as evidence of disinflation is showing up all over the place – and that means rates might next move downwards. Equities are back on the buy list and that very same fixed income trade – lock into high yield and look for capital gains – is back in vogue too.”

He added: “The outlook for 2024 is unusually unclear. Many central banks are reluctant to signal rate cuts are coming, though the markets are ignoring them for now. The extent of the economic slowdown in the UK and Europe, and whether the red-hot US can engineer a soft landing are also crucial to the outlook for asset prices – and fund flows.”

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