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Calmer markets tempt UK investors back to funds

A strong recovery in global markets during November tempted UK investors back into equity and bond funds for the first time in months, according to the latest Fund Flow Index from Calastone. Confidence is fragile, however, so buying was selective, and investors favoured safe-haven money markets over both equities and bonds.

After six months of net selling, investors dipped their toes back into equity funds in November, adding £449m to their holdings, just under one-tenth of the net £4.54bn total they had withdrawn between May and October.

Buying was selective, however. Investors added a record £414m to emerging markets funds and have now been net buyers for 14 months in a row. Continued strength in the US economy, with rapid GDP growth and falling inflation, drove £481m of new capital into North American equity funds, their best month since June 2022 and their sixth best on Calastone’s record. Global funds also remained in favour, attracting £802m of new cash. Meanwhile, Japanese funds saw inflows of £111m, accounting for almost £9 in £10 of the net cash flowing into specialist regional funds.

As COP28 convenes in Dubai, investors appear increasingly sceptical about ESG funds. ESG equity funds suffered their seventh consecutive month of outflows in November, as investors withdrew £524m of capital.

November’s net selling took the total since outflows began in May to £3.66bn, compared to outflows from non-ESG equity funds of £431m in the same period. (year-to-date ESG -£2.34bn v non-ESG -£89m). The biggest outflows have come from ESG funds focused on North America, followed by UK-focused funds. Only ESG funds investing in emerging markets have continued to attract inflows this year as part of a wider trend of record inflows to emerging market funds.

The trend is not restricted to equities alone. ESG fixed income funds have seen outflows for nine months in a row as a net £483m has been withdrawn from the sector. This contrasts with £2.92bn of inflows to non-ESG fixed income funds. (year-to-date ESG -£332m v non-ESG +£4.83bn). ESG mixed asset funds are also seeing outflows, though this is in line with wider market trends.

The fixed income sector had a better month in November too, after yields soared in October to their highest level since the global financial crisis, pushing down bond prices (bond prices move inversely to yields). November saw the first sustained decline in bond yields after six months of painful increases, and this drove capital back into fixed income funds for the first time since July. Investors added a modest £256m to their holdings as a result.

Despite the improvement in sentiment towards fixed income and equities, investors remained cautious. Money market funds (MMFs), the least risky category of funds available, absorbed more than twice the amount that went into fixed income funds in November, with a net inflow of £525m. Year-to-date MMFs have absorbed £4.09bn of cash, more than in the previous eight years combined (£3.49bn).

Elsewhere, mixed asset funds suffered a record outflow of £1.59bn, reflecting investor scepticism over their ability to offer a superior risk/reward profile while bond and equity markets are moving in tandem. Finally, outflows from property funds rose again, reaching £88m.

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