Investors bail out of UK equity funds in June as economic data lags behind

Bank of England

Investors that bought into the stock market recovery in April and May largely banked their gains in June, with equity funds shedding GBP1.2 billion in outflows, according to Calastone’s latest Fund Flow Index.

Actively managed equity funds lost GBP1.1 billion, but even index funds saw their first outflows since October 2016, shedding GBP62 million. Within that, UK equity and equity income funds suffered record outflows of GBP679 million and GBP671 million respectively. Mixed asset funds also lost GBP228 million.

Edward Glyn, head of Global Markets at Calastone, says: “In the middle of a global economic and health crisis of this ferocity there’s no doubt investors are banking the big gains they have made on the billions they have ploughed into the market since its lows in March." 

While the MSCI World Index has made an encouraging recovery, ending the second quarter down only 7 per cent year-to-date, but the UK’s FTSE 100 has lagged behind, still down 25 per cent for the year alongside worsening economic data.

“The record outflows from UK funds seems to be explained by a combination of three factors. First, the economic news from the UK was especially bad in June, second a no-deal (or “Australia-style”) Brexit is increasingly likely, and third, the impact of dividend cuts is greater in the UK than in most other parts of the world,” says Glyn.

“This third factor also explains the record outflow from income funds. This category has been out of favour for a long time, but with global dividends set to fall by a fifth or more this year according to Janus Henderson, there is less allure from equity income.”

Calastone says April and May saw investors in equity funds add a net GBP3.9 billion to their holdings, the largest two-month period of inflows on Calastone’s record.

June’s outflows of GBP1.2 billion make it the fifth worst month on Calastone’s record. Calastone’s equity fund flows index has registered its worst month this year with a reading of 46.8. A reading of 50 means inflows equal outflows.

Most of the cash pulled out of equity funds was “switched for the relative safety of fixed income and money market options,” says Calastone. Between them, they gained GBP927 million inflows in June. This sent Calastone’s Fixed Income and Money Market fund flows indexes up to 54.3 and 64.4 respectively. 

Fixed income funds have benefited from Central Bank bond buying schemes that have been announced in the Eurozone, UK, and US. Money markets have seen huge inflows ever since March from investors seeking a safe haven during the coronavirus crisis.

“Almost all the trading signals across Calastone’s network pointed in the same direction in June – investors bailing out of riskier fund categories into safer ones, even affecting segments like index funds and mixed asset funds that almost never see outflows. In March, investors were reactive, getting caught out by the sudden market drop. Now they seem to be anticipating a significant renewed market correction – we will see in due course if that materialises,” says Glyn.

Transaction values (buys plus sells) in equity funds remained high, totalling GBP18.5 billion in June, more than a quarter more than the monthly average in 2019.