Fixed income strategies received strong net inflows of £834m from UK investors in February, the third-highest figure for the asset class over the last two years, according to Calastone’s Fund Flow Index.
Although this was a very strong showing for the asset class, flows were well down compared to January. Calastone’s report, which tracks the activity of UK investors, blamed the recent deterioration in bond markets for the near £400m disparity between January and February’s inflows.
As the popularity of fixed income has blossomed, that of equities has receded dramatically, and the recent shift from equities to bonds has been stark. Since July 2022, investors have added £4.9bn to their fixed income fund holdings while withdrawing £5bn from equity funds.
Calastone’s head of global markets, Edward Glyn, said the rotation towards fixed income was a product of both enticing interest income, and investors acting on the fact that they are overweight equities for the current market conditions.
January’s fund flow data from the Investment Association showed UK investors heavily cutting their exposure to equities, with UK-focused funds suffering the most acutely.
Calastone’s February data demonstrated that this trend was accelerating, as UK equity funds were hit by their third-worst month of outflows. Investors pulled £962m from the sector, with only June and November last year generating a worse monthly performance.
Glyn said stock markets have sagged on the realisation that interest rates may have to go higher, and stay there for longer. Despite the strong performance from the FTSE 100 over the last year, Glyn said there is a structural diversification process underway as UK investors look to reduce their heavy weighting to UK-focussed funds.
“The general air of pessimism over the UK’s economic decline, weak government finances, political chaos, and rising corporate taxes seems to have accelerated this trend with consistent outflows from UK funds,” he said.
Further afield, sharp falls in the US stock market prompted redemptions of £368m from North American equity funds, more than double the level in January, while European equities suffered their 17th consecutive month of outflows as investors pulled £250m of capital from the sector.
A £50m outflow from Asia Pacific almost exactly reversed January’s modest inflow, and only those with global mandates saw inflows, as investors added £1.1bn.