ESG funds accounted for 90 per cent of inflows in July

Inflows to equity funds drifted lower in July as investors grew more concerned about global growth and the high value of stock markets around the world. 

The latest Fund Flow Index, from Calastone, the largest global funds network, showed that net inflows to equity funds fell to GBP1.12 billion, around half the average monthly inflow over the last six months (GBP2.05 billion), However, most the impact was felt by index funds, with strong inflows into active funds, primarily on account of continued demand for ESG equity funds which were major winners amongst investors.

ESG equity funds accounted for 90 per cent of July equity fund inflows – and most of this capital was actively managed

The big winners were ESG equity funds, which saw net inflows of GBP995 million (89.5 per cent of July equity fund inflows), the second-best month on record for ESG. More than nine-tenths of this ESG capital flowed into active equity funds, helping explain why active funds overall held up so much better than their passive counterparts.

Index funds suffered most, but active funds saw strong inflows

Notably equity index funds suffered most. Inflows dropped to GBP39 million, their second-worst month in over five-and-a-half years. Inflows to passive funds in July were 90 per cent lower than their long-run monthly average. Inflows to active funds, by contrast, held up remarkably well, totalling GBP1.08 billion for the month, thanks to strong demand for ESG strategies.

Since 2015, inflows to ESG equity funds have totalled GBP11.6 billion – astonishingly 99 per cent has flowed in since August 2019. The vast majority of this cash has been devoted to Global ESG equity funds – in 2020, for example, 81 per cent of ESG equity fund inflows were to this category. 

Calastone’s analysis demonstrates that investors are now increasingly fine-tuning their ESG fund purchases. Year-to-date, Global ESG equity funds have garnered only two thirds (66 per cent) of new ESG equity capital, while in July, the figure dropped to 52 per cent, the lowest ever reading.

ESG equity funds with more targeted geographical or sector focus have begun to take a greater share of new inflows. For example, this time last year ESG UK equity funds had still not made up for years of steady outflows pre-2019, but inflows have now picked up sharply, totalling GBP607m year-to-date. In July, GBP1 in every GBP12 flowing into ESG equity funds was devoted to those with a UK focus. 

ESG Sector funds, a fairly new category which mainly comprises sustainable energy, water, general environmental, and infrastructure specialists, have been particular winners. Year-to-date they have garnered GBP764m in inflows, two thirds of all their cumulative inflows since 2015. In July GBP1 in every GBP4 flowing into ESG equity funds has been to this category.

2021 has also seen record inflows to ESG equity funds focused on Europe, North America, emerging markets, specialist regions and equity income. 

Elsewhere in the UK funds market, inflows to fixed income funds rose to GBP696m as falling bond yields, pushed lower by global-growth concerns, attracted buyers (falling yields mean capital gains for investors). Meanwhile, real estate funds continued to suffer outflows (the 34th consecutive month), though the level of outflows slowed sharply as Freedom Day raised hopes of a recovery in demand for commercial property in sectors hit hard during the pandemic.

Edward Glyn, head of global markets at Calastone says: “Active funds have always been a fairly simple bellwether of sentiment – when investors were nervous, active funds bore the brunt of outflows; when they were brimming with confidence they would pile into them. Index funds, by contrast, tended to show much steadier inflows in good times and bad, reflecting the strong position they had secured in monthly savings plans. 

"ESG funds are proving a real game-changer. Investors seem to view them as a class apart – even after two years of dramatic growth, the trend of inflows is still firmly on an upward path, with only relatively minor wobbles when the wider stock market is down. Most ESG funds are actively managed, so the ESG gold rush is masking what are in fact much more normal trading patterns for ‘traditional’ active equity funds – flows for these funds are still just as driven by sentiment as ever. In the last two years, non-ESG active funds have seen outflows in more than five months in ten.”