UK investors gravitated towards safe-haven assets in May as economic threats showed no signs of easing, according to data from Calastone’s Fund Flow Index.
Money market funds offering high yields absorbed £419 million worth of capital in May, the most since the September 2022 UK “mini-budget” and the second-most since pre-lockdown levels. Calastone attributed the performance to high volatility in bond markets, the likely trajectory for interest rates owing to inflation, the US debt ceiling and the overall economic growth outlook.
Edward Glyn, head of global markets, Calastone, said: “Money market funds invest in bonds with very short maturities, so they are typically among the least risky assets available. Wobbles in the US banking system have reminded investors of the risks of having bank deposits above insured thresholds too, leaving money markets as an obvious place for wealthier individuals to park surplus cash.”
Volatility in bond markets during May dampened enthusiasm for riskier fixed income funds that invest in bonds with longer maturities. However, investors still added a net £318 million, possibly attracted by high yields. Corporate bond funds, which invest in debt issued by large companies, absorbed most of this new capital.
Glyn said that curbed fixed-income inflows were indicative of a diversity of opinions among investors towards the asset class. “Some are attracted by higher yields, others deterred by capital losses on funds already invested.”
Equity funds suffered outflows as an outcome of inflationary concerns that volatile bond markets indicated reported Calastone. After enjoying inflows in March and April, investors withdrew a net £302 million in May, recording the worst figure for equity funds since the mini-budget.
UK-focused equity funds were hardest hit, with outflows of £583 million driven both by a sharp drop in buying activity and a small increase in selling.
The trend of inflows to North American funds in the last two months was reversed and there was increased selling of European equity funds, noted Calastone.
Sentiment on Asia-Pacific also turned negative, with only global funds and emerging market funds gaining £849 million and £212 million, respectively.
Investors also withdrew a net £304 million from ESG equity funds, meaning May was the “worst-ever month” for the asset class. May was only the second month during which investors have been net sellers in this sector in over five years.
Among other asset classes, mixed-asset funds and property funds also suffered outflows. Investors sold down a net £46 million of their holdings in property funds, the “worst month” for the sector since January. According to Calastone, the net outflow was driven primarily by a “buyers’ strike”. Volume of buy orders shrank by almost one-third during the month, while the volume of sell orders rose by just 2.5%.
Glyn commented: “Most stock markets were flat across the month, except the UK, where the index fell as equity investors reeled at the impact of UK bond yields soaring above Italy’s for the first time since the mini-budget.”
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