Active funds ride the post-vaccine wave while appetite for index funds slow, says Calastone

A strong month for equity funds saw inflows rise to GBP1.3 billion in August, according to the latest Fund Flow Index (FFI) from global finds network Calastone. 

Since the sea change in sentiment towards equity funds that accompanied the announcement of successful clinical trials of Pfizer’s, Moderna’s and AstraZeneca’s Covid-19 vaccines in November 2020, investors have added GBP17.2 billion to their equity holdings. This means more than a third of the net inflows to equity funds (35 per cent) since 2015 has taken place in the last ten months alone.

Global funds saw the largest net inflows in August (GBP1.1 billion), much of this targeted at ESG offerings. Most other categories saw only modest inflows, though funds focused on UK equities, equity income and Asia-Pacific all suffered outflows.

Index-tracking funds fared significantly worse than their active counterparts for the seventh month in a row, and have now seen lower inflows (or actual outflows) in nine out of the last ten months. (In the previous 2.5 years, passive funds have either had lower inflows or larger outflows than worse than active funds in only three months). A net GBP4m, essentially a rounding error, was added to index trackers in August, compared to inflows of GBP1.3 billion for actively managed funds. 

The change in sentiment towards active funds can also be pinpointed to the big vaccine moment in November 2020. Three quarters (GBP12.6 billion) of the GBP17.2 billion net new capital into equity funds since November has been pumped into active funds. Between 2015 and that point, by contrast, active funds had only garnered one fifth (GBP6.8 billion) of the GBP30.8 billion committed to equity funds overall. Passive vehicles had previously absorbed the lion’s share. 

Certainly, the ESG boom has been a major driver for active funds recently, accounting for over three fifths of active inflows since the November sea-change, but it is increasingly clear that other types of active fund are enjoying a resurgence too. Even if we strip out all the active ESG money, traditional active funds have nosed ahead of index trackers over the last ten months, with inflows of GBP4.7 billion, compared to GBP4.1 billion for their passive counterparts.

The total volume of buy and sell orders (ie turnover) for equity funds was low in August reflecting a common seasonal pattern, falling to GBP17.3 billion, its lowest level since September 2020. The relatively strong net inflow set against low overall turnover pushed the FFI: Equity to 53.7, a healthy reading well above the neutral 50 mark, where buys equal sells.

Among the other main asset classes, investors seem to be falling out of love with mixed asset funds. These gathered just GBP138m of new capital in August, compared to a long-run monthly average of GBP1 billion. They have seen below-average inflows in most months recently. Meanwhile, outflows from property funds fell to their lowest level since February 2020, before the pandemic really hit the UK, in a sign that the worst may now be past for the troubled sector. Fixed income inflows of GBP500m were exactly in line with the average. 

Edward Glyn, head of global markets at Calastone, says: “Every couple of years, we have seen a period where investors take a greater interest in active funds than they do in their passive counterparts. The current switch of focus is particularly extreme, with August the third-worst month for passive funds in five years. Turnover levels for active funds are far greater than for their index-tracking counterparts relative to net inflows, however, and turnover is more volatile too. This reflects a greater trading mentality among investors when it comes to their active holdings, while passive funds typically sit more quietly in monthly savings plans. The unusual times we live in seem especially suited to greater engagement by investors with their fund holdings.

"Certainly, the rise of ESG funds has pulled investor focus from passives too, but we do not expect this to herald a long-term loss of faith in index trackers. Low costs and solid returns remain key attractions that will gradually shift market share of total assets under management in favour of trackers.  

"Marketing focus by fund management houses should not be underestimated either. It exerts a clear influence on investor decision making, often via the advised route. The loss of interest first in absolute return funds, and more recently in mixed-asset funds reflects a switch of marketing spend to the ESG segment. As a trend establishes and more investors respond, firms develop more products and devote more spend. The process can drive inflows for a prolonged period.”