ESG equity funds suffered their worst ever month of outflows as a net £304m was pulled from sustainable strategies in May, according to Calastone’s Fund Flow Index.
It was only the second month in the last five years where ESG funds have been net sellers.
UK investors instead turned to money market funds to provide shelter from macroeconomic uncertainty over the US debt ceiling, sticky inflation, and the likely path of interest rates. A net £419m flowed into the asset class during the month.
See also: Money market funds grow 306% at Interactive Investor
Money market funds invest in bonds that are due to mature soon, so that investors can earn income on cash with less sensitivity to rate rises than conventional bond funds.
Investment platform Interactive Investor has witnessed a 306% increase in assets under administration in the asset class since the end of 2021.
Edward Glyn, head of global markets at Calastone, said: “These bonds have yields very closely linked to central bank policy rates which are of course at their highest levels in over a decade at present and have therefore been looking attractive compared to still meagre bank savings rates.
“Wobbles in the US banking system have reminded investors of the risks of having bank deposits above insured thresholds too, leaving money markets as an obvious place for wealthier individuals to park surplus cash.”
Investors added a net £318m to fixed income strategies, half of the monthly average the asset class recorded last year.
Equity upturn proves fragile
After enjoying strong £1.4bn inflows in April, sentiment reversed for equity funds as investors pulled a net £302m from the asset class.
By sector, only global (£849m) and emerging market funds (£212m) recorded inflows.
“May’s bond market ructions had surprisingly little impact on share prices but fund investors, recognising that higher yields are bad for stock markets, clearly contracted buyer’s remorse after ploughing so much cash into equites in the previous two months,” Glyn added.
“Most stock markets were flat across the month, with the exception of the UK, where the index fell as equity investors reeled at the impact of UK bond yields soaring above Italy’s for the first time since the mini-budget.”
