Investors bet on a strong global economic recovery in 2021 as fund inflows rose by 140% to $150.5bn (£110.4bn), according to a report from Calastone.
This rise in inflows came on the back of a strong year in 2020, when investors ploughed in $62.6bn of new money into funds despite a rocky first quarter in which investors withdrew $9.7bn in net outflows. They poured $72.3bn back into funds over the following three quarters.
The 2020 figures were 20% higher than 2019, despite the world fighting a global pandemic and many economies suffering widespread lockdowns throughout the year.
Savers were heartened in 2021 by a potential end to the pandemic. Economies rebounded in the aftermath of Covid-19 as the end of lockdowns signalled a path back to normality.
Of the $88bn increase in overall net inflows between 2020 and 2021, equity funds and mixed assets accounted for two thirds, according to the report.
The chart below shows the difference in inflows seen over 2019, 2020 and 2021, where equity inflows in 2020 and 2021 dwarf the figures in 2019.
Source: Calastone Global Fund Flows Report
According to Calastone’s data, the first half of 2021 was when the most money flowed into equity funds, peaking at $8bn in March.
These funds enjoyed average monthly inflows of $5.5bn between January and July, which then tailed off markedly in the latter half of the year. By October, the net inflow had fallen to just $863m, the lowest level in more than 12 months.
The report said that the slowdown was driven by lower buying activity, not by increased selling, indicating that this was not a wholesale reappraisal of equities, but rather a reluctance to commit new capital to this riskier asset class at a time of high prices and rising concerns over inflation.
At the end of the year, however, optimism returned, as it became clear that the Omicron variant was unlikely to cause the same disruption as previous mutations. As a result, December inflows jumped back to $4.2bn, putting it in line with the full-year average.
Within the equity inflows, there was a divergence between tech funds and value funds during the year. Technology funds experienced net outflows from June to September for four consecutive months, which is the longest run in the three years Calastone has been tracking figures.
And between October and November, no net new cash flowed into tech funds, although December was more positive, driven in particular by buying among Asian investors, the report found.
Value strategies on the other hand, had a good 2021 after being out of favour for years. Not only did investors return all the capital they had taken out of value funds in the previous two years, a third more was added.
Environmental, social and governance (ESG) funds were the big winners of 2021, taking in $32.1bn in new capital in 2021, equivalent to $3 in every $5 of new cash committed to equity funds of all kinds, the report found.
Although this ESG shift has particularly favoured active funds, even excluding ESG funds active funds enjoyed inflows around 2.5 times greater than passives in 2021.
This broke the trend of the past several years where index funds garnered more inflows than active funds.
Source: Calastone Global Fund Flows Report
Conversely, fixed income flows also slowed as 2021 progressed Calastone found. In November bond fund inflows of $731m were just a third of the January to October monthly average. The surge in inflation was seen as negative for bond funds due to the associated rise in yields and downward pressure on prices.
However by December, there was also a marked reversal, with fixed income flows recovering to $2.2bn.
The report suggested that the fund flows indicate a split opinion among investors, where some dismissed Omicron concerns to buy equity funds, while others favoured fixed income, judging that the virus was bad for global growth, temporarily at least, putting inflation fears on the back burner.
In contrast, mixed asset funds saw fairly stable inflows during the year, reflecting their diversified nature. According to the International Investment Funds Association (IIFA), assets under management are more than 25% higher than the pre-pandemic peak.
Real estate funds were the only asset class that suffered from outflows in 2021, according to the report. Investors in Europe and the UK were especially negative, while Australians continued to add cash, though at a much slower rate by the end of 2021.
By the end of the third quarter of 2021, open-ended funds were worth $68.3trn, with more than nine tenths of this capital owned by retail investors and the rest owned by institutions.
Edward Glyn, head of global markets at Calastone, said: “Confidence and cash combined in 2021 to drive investors on a fund-buying spree. Savings ratios jumped around the world in 2020, in many cases to record levels, leaving households flush with cash in 2021.
“A little of this cash found its way immediately into funds in 2020, but many investors held fire until they had greater clarity on how long the disruption would last. 2021 was the main beneficiary.”
He said that as savings ratios drop back to more normal levels, he expected fund flows to diminish this year as investors have less pent-up cash to deploy.