Equity funds’ year-end inflows “evaporate” as January pandemic surge curbs investor risk appetite

London lockdown

Investors pulled back from equity funds in January, with appetite for risk assets dampening as global coronavirus cases registered a post-holiday surge.

Funds network Calastone found that December’s vaccine-fuelled inflows to equity funds “evaporated” in January, with net monthly inflows falling 97.5 per cent month-on-month to just GBP64.6 million. Total trading volumes in this period exceeded GBP21 billion.

Heavy outflows of GBP965 million were dealt to active equity funds that lacked an ESG mandate, causing them to lose almost all of the GBP1 billion in new capital that they had gained in December.

“The euphoria that characterised the huge inflows to equity funds in the last few weeks of 2020, including even unloved traditional active funds, dissipated with the cold light of the post-holiday hangover,” says Edward Glyn, head of global markets at Calastone. “The pandemic has increased in intensity in almost all parts of the globe, causing stock markets to falter and investors to curb their enthusiasm for equities.”

UK and European equity funds also suffered from outflows as national lockdowns, border closures, and curfews returned across the continent.

Outflows from funds focused on UK equities accelerated to GBP179 million, and equity income funds, which are heavily weighed to UK shares, had their second-worst month on record.

Investors also sold GBP141 million of European funds, as Europe’s vaccine debacle weighed on investor sentiment toward the bloc.

“Despite the success of its vaccine rollout, the UK market remains firmly out of favour – a new lockdown, severe disruption caused by Brexit and the unfavourable complexion of the UK stock market dominated by slow growing value stocks all make it difficult to construct a compelling buy case for UK shares. But Europe is once again sinking into the doldrums too. We are likely to see outflows here continue in the short term,” comments Glyn.

Investors favoured bond funds with strong inflows of GBP1.2 billion, which picked up more capital after a jump in bond yields in January. The US yield curve reached its steepest level in more than five years, as economic outlook improved on successful vaccination roll-outs and expectations of major economic stimulus from the Biden administration.

“Meanwhile, the prospect of enormous fiscal stimulus in the US along with continued record borrowing across many major economies pushed bond yields higher in January. Investors are awash with cash and looking for any assets that can provide a return. With equities out of favour, more attractive yields quickly tempted additional buyers into bond funds,” says Glyn.

One of the only equity segments to enjoy growth in January was active ESG equity funds which gained inflows of GBP545 million, their third-best month on record. Calastone says that the value of buy orders for active ESG equity funds during the month was twice that of sell orders.