Spread of Indian variant dampened enthusiasm for UK equities in May, says Calastone

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Fund inflows slowed in May after the flood of new capital that poured in during March and April, according to the latest Fund Flow Index (FFI) from Calastone, the world’s largest funds network. 

Even so, inflows to equity funds reached GBP2.2 billion, their eighth best in any month on Calastone’s record, and more than twice the monthly average over the last year.

Investors are showing a particular preference for emerging market funds. They saw the second-highest inflow on record in May (GBP256 million), worth roughly one percent of the segment’s funds under management in a single month. By value, global funds saw the biggest inflows (GBP1.25 billion), their fourth-best month, but as the largest fund category this was a much smaller addition relative to funds under management than for emerging markets. 

Nervousness about a third Covid wave and about potential delays to lockdown easing in the UK dampened enthusiasm for UK-focused equity funds, however. Flows for the month overall were still positive to the tune of GBP147 million, but this was a sharp reduction compared to March and April (+GBP907 million between them). From 11th May onwards, net flows even turned negative as the UK news darkened with an acceleration in infection levels. European funds remained in the doghouse too with just GBP31m of inflows, a rounding error in the context of GBP1.7 billion of combined buy and sell orders. 

It was another strong month for active equity funds. Inflows of GBP1.6 billion were almost three times as large as the GBP580 million that investors committed to their passive counterparts. Active funds have now beaten their passive rivals in six of the last seven months, having done so only twice in the previous two years. ESG funds remain a key part of the active success story, but for the last two months they have ceased to provide the main explanation for the explosion in active fund flows. In May active ESG funds attracted GBP680 million, but other active equity funds accounted for the remaining GBP930 million. Conventional global funds, emerging market and North American funds were the biggest beneficiaries of this new trend in May.

The picture is not as good for real estate funds. May saw the second-largest outflows on Calastone’s record, as investors redeemed a net GBP445m of their holdings. By value, sell orders outweighed buy orders by five to one, generating an FFI:Real Estate of just 17.3 (a reading of 50 means buys equal sells).

Fixed income funds saw their slowest inflows since October 2020, though at GBP662 million they remain above the long run average. Calastone noted that index-linked fixed income funds, though a small category, saw a second consecutive month in which buying activity was disproportionately large compared to the wider fixed income category.

Edward Glyn, head of global markets at Calastone, says: “Strong prices for commodities, a weak US dollar, rising demand in developed economies and improving global trade are all good for emerging markets and this is spurring confidence among investors, even if many emerging markets are still in the worst phase of the pandemic. The same optimism lies behind the appetite for global equity funds.

"Meanwhile, a lot of hope has been baked into UK-focused equity funds since the end of January as the rapid vaccine rollout raised hopes of release from Covid restrictions. Certainly the economic data from purchasing manager tracking, economic growth and retail footfall is extremely encouraging, even if the infection numbers are going in the wrong direction. Whether the outflows that began in mid-May can be reversed will depend entirely on whether the government presses ahead on 21st June.

"Index-linked bonds protect investors from inflation, so the disproportionate interest in funds that specialise in this asset class is a sign that some investors are wary of rising prices. They will need to be careful. If interest rates need to rise more sharply than is expected, index-linked bonds will fall in value, offsetting their inflation protection.”