UK’s September turmoil sparks flight from UK equity funds as outflows hit second-worst month on record

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Funds focused on UK equities suffered heavy selling from investors spooked by the multiple crises afflicting the UK in September, according to the latest Fund Flow Index from Calastone. 

Investors sold down a net GBP567 million during the month, the second-worst month for UK equity funds on the Calastone FFI’s seven-year record. September stood out because investors clearly singled out UK-focused equity funds. This contrasted with the situation in June 2020, the worst month on record, as investors at that time sold heavily across almost all equity categories in order to take profits after the sharp increase in global markets sparked by huge stimulus from central banks.

Active UK-focused equity funds bore the brunt of the September selling, accounting for 98% of the overall outflow from UK-focused funds during the month. This is consistent with the more discretionary approach investors take with active funds – asset allocation decisions like this are much more likely to be applied to active funds, while passive funds, usually cemented in regular savings plans, see much less volatile trading. Calastone also noted that ESG funds investing in the UK continued to enjoy modest inflows - it was non-ESG funds that saw all the selling.

While investors pummelled UK-focused funds, most other categories continued to enjoy healthy inflows. Emerging market funds for example saw record inflows of GBP407m, global funds GBP805m (lower than in recent months but ahead of the long-run average) and North American funds GBP230m. Even relatively unloved European equity funds added a modest GBP37m during the month. Meanwhile equity income funds, which are heavily allocated towards UK equities, suffered outflows in common with the pure UK-equity strategies. 

The large outflow from UK-focused funds dragged down the overall September net inflow for equity funds to its lowest level since January 2021 (GBP450 million in September). Once again, investors clearly favoured ESG equities, adding GBP1.1 billion, the second highest monthly inflow on record, while withdrawing GBP690 million from non-ESG equity funds (with the brunt of course borne by UK-focused strategies). ESG’s success means that GBP3 in every GBP5 investors have added to equities in 2021 have flowed into ESG funds.

Elsewhere, fears surrounding rising bond yields dampened appetite for fixed income funds – inflows continued but at a level well below the average for the last year. Meanwhile outflows from property funds remained at the much lower levels seen over the last three months compared to the painful flood of capital that has left the sector since fund suspensions were lifted in autumn 2020.

Edward Glyn, head of global markets at Calastone, says: “The petrol panic, soaring inflation, empty supermarket shelves, fractured supply chains, crippling staff shortages and turmoil in gas and electricity markets are all taking their toll on investor confidence. With so much going wrong so quickly, investors have voted with their feet and dumped UK assets. Investors know that other parts of the world are also experiencing some of these difficulties, but inflows to funds focused on other regions emphasise that they realise the problems are more widespread and more acute in the UK than elsewhere. 

"It has been an unusually hapless month for the UK. We have all strapped in for a bumpy few months of news ahead, so we should also brace for further volatility in fund flows for UK equities.”

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