Actively-managed ESG funds see fourth month of record inflows in July

Waves

Appetite for ESG funds continued to soar in July as inflows reached record levels for the fourth month running, leaving ESG as one of the only actively-managed fund types to see greater inflows than passive counterparts.

Calastone’s fund flows index (FFI) showed Global ESG hit an “astonishing” reading of 78.4 year-to-date, meaning that buying activity has outweighed selling activity more than 3:1. The overall FFI: Equity has barely stayed in positive territory, averaging 51.

Edward Glyn, head of global markets at Calastone says this is the result of a “huge marketing push by the fund management industry in favour of ESG funds, partly in response to very strong investor demand for ESG products and partly because they offer better margins for managers”. 

“Indeed, because ESG funds tend to be actively managed, they are also the one area of real strength for active equity funds, which are otherwise suffering at the expense of their passive counterparts,” says Glyn.

Investors poured GBP362 million into ESG funds during July, according to Calastone’s monthly fund flows report. The data provider says GBP1.2 billion has flowed into the funds since April, exceeding combined inflows for the previous five years.

The preference for ESG was so pronounced that over half of all the money that went into global funds flowed into ESG funds. Meanwhile, the newly-popular fund type only accounts for GBP39 billion assets under management, little over 3 per cent of the total in the UK funds market, according to an analysis of Lipper data.

This bucked trends as investors were cautious of equities on the whole, with equity funds shedding GBP240 million in a second month of outflows, and active equity funds losing GBP638 million. UK equities funds were hardest hit, seeing outflows of GBP377 million in July, taking the two-month total outflow from UK equities to almost GBP1.1 billion. 

“Caution on equity markets has prompted outflows from equity funds for two months in a row. Weakness in stock markets in July seems to have justified that scepticism and ensured that June’s outflows from equities continued though at a lower level. But even though capital is leaving equity funds overall, a wide gulf is opening up between those funds in favour and those leaving investors cold. The dichotomy between growth and value helps explains why this is happening,” says Glyn.

“Record low interest rates are inflating the value of future profits. Growth stocks in particular have more of their value tied up in ‘the future’ so their share prices benefit significantly more when money is cheap. Stocks where more of the income is being delivered today benefit less – their valuation depends more on things going well right now. With so many ‘value stocks’, many of which have cut dividends hard, it’s no wonder the UK stock market has underperformed in the global market rally since March. This explains the outflows from UK-focused funds and helps explain the increased surge in outflows from income funds.”

Other beneficiaries of investor caution were passive funds, gaining inflows of GBP398 million, and fixed income funds with positive flows of GBP653.6 million.