UK investor risk appetite surged in December, with safe-haven money markets and fixed income funds emerging as the “big winners” in 2023, according to fund flow index data provider Calastone’s data.
December witnessed a surge in sentiment across various asset classes. Equity funds experienced a remarkable upswing with inflows reaching £1.19 billion, marking their best month since April 2023 and the second-highest level in nearly two and a half years. Notably, US equity funds recorded record monthly inflows, more than doubling to a historic £968 million. European equity funds also attracted a net £476 million in December, the second-highest monthly inflow on record.
However, despite the positive momentum in December, equity funds recorded annual outflows for the second consecutive year, totalling a net £1.24 billion in 2023. The fund management industry faced ongoing challenges, particularly with UK-focused equity funds experiencing their 31st consecutive month of outflows, said Calastone.
ESG equity funds faced an eighth consecutive month of outflows in December, with net selling reaching -£54 million. This marked a reversal of just over one-tenth of the inflows accumulated during the “ESG boom” since late 2019.
Money market funds emerged as winners in 2023, absorbing a record £4.38 billion in capital, surpassing the total for the previous eight years combined.
Fixed income funds saw inflows rise in December to a net £283 million as investors became increasingly convinced that the interest-rate cycle in the US, Europe and the UK has now peaked. The asset class saw mixed results throughout the year, with a strong start followed by caution and a lack of significant new investments in the second half of 2023.
Other asset classes, including mixed asset and property funds, faced challenges, with net outflows totalling £4.82 billion and £601 million, respectively, in 2023.
Money market funds excel for two key reasons, highlighted Edward Glyn, head of global markets at Calastone. They provide a haven by investing in short-term fixed-income securities, minimising credit risk with quick bond redemptions and offering high yields. Additionally, their yields surpass those available for cash deposits at banks, diverting funds from the banking sector that might otherwise remain in instant access savings.
“The extent of the economic slowdown in the UK and Europe, and whether the red-hot US can engineer a soft landing are also crucial to the outlook for asset prices – and fund flows,” he added.
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