More money than ever was ploughed into equity funds in 2021 as investors ended the year with an optimistic mindset with Omicron fears dissipating in December, new research has found.
The Calastone Fund Flow Index (FFI) found that £14.2bn of new money was allocated to funds investing in stocks over the course of last year, a significant jump from the previous £11.6bn peak set back in 2015.
Source: Calastone Fund Flow Index (FFI)
Calastone analysts said that the last minute boost came from investors’ fears about Omicron subsiding and being replaced by a more enthusiastic outlook for equities. The total net inflow for December was £1bn, double what it had been the previous month when Omicron was first detected, Calastone found. This was the highest monthly net inflow since August that year.
The biggest winners for the year were global and emerging market funds, with environmental, social and governance (ESG) focused funds taking a big portion of global sector inflows.
The Calastone data found that £6 in every £10 that went into global equity funds was allocated to an ESG fund. Overall, £13.4bn was added to this area of the fund universe – a record for a sector in a calendar year.
This was 76% higher than the previous record set in 2020 and in December alone, global funds had £1.3bn net inflows, around seven times higher than the next most-popular region, the emerging markets (£191m).
The total inflows into emerging market funds in 2021 were also exceptionally high in comparison to the sector’s history, Calastone found, with £2.2bn added over the course of the year, equal to the five previous years’ worth of inflows combined.
Edward Glyn, head of global markets at Calastone said that: “Interest in emerging market funds provides further evidence that there is a greater appetite for risk.”
Fixed income also had a very positive year, with the highest inflows in five years (£6.6bn in 2021).
Calastone analysts identified an inflow and outflow pattern for the sector, noting that investors favoured fixed income during the months when Covid news worsened but fell out of favour when inflation concerns picked up.
The analysts noted than the allocation to ESG portfolios within fixed income was becoming a “meaningful driver”, with one quarter of inflows into the sector going into ESG.
Not all sectors received quite as much love. The UK had a down year for inflows versus other parts of the market, shedding £1.1bn for the whole of 2021, Calastone found, worse than any regional sector. Equity income funds, suffered a sixth consecutive year of outflows, with £4.3bn withdrawn last year.
Glyn said that a combination of economic wobbles in the fourth quarter, political instability, rising interest rates, “Brexit chaos” and renewed Covid restrictions in various parts of the country meant that many investors had looked elsewhere for equity returns.
He added that outflows from the UK did slow down towards the end of the year, but not entirely and December was the seventh consecutive month that investors withdrew cash from the sector. The final month of the year was one of the worst on record with £362m removed from the sector.
The only other regional sector that had net outflows for the year was European equities.
The Investment Association (IA) confirmed this overall pattern of results for equity markets, as the trade body released its flow figures for November.
Overall, £2.4bn was added to funds in during the month, with global equity portfolios the top allocation, while investors’ growing appetite for ethical funds was present, as the sector took in £1.8bn in net retail sales during the month.
Chris Cummings, chief executive of the Investment Association, said: “The retail funds market was stable in November as investors remained committed to funds, however low inflows into trackers hint at investor uncertainty, with US equities trackers and fixed income trackers particularly out of favour.
“There is one area of certainty however, and that is the continued appetite for sustainable and responsible investments, as investors continue to seek to use their investing power for good.”