Russia’s attack on Ukraine caused the biggest outflow from equity funds since the Brexit referendum in 2016 after more than £1.5bn was pulled from the strategies as investor sentiment soured, Calastone’s latest data has revealed.
Equity funds had a total outflow of £1.53bn in March, with withdrawals picking up in momentum throughout the month as the invasion continued. This is just shy of the July 2016 record when UK investors redeemed £1.56bn from their equity holdings after the UK voted to leave the European Union (EU).
Source: Calastone Fund Flow Index (FII)
Edward Glyn, head of global markets at Calastone, said the world’s major stock markets were “very volatile in March, but they have mostly regained the losses they sustained when Russia attacked Ukraine on 24 February”.
“This has not been enough to reassure UK fund investors,” he added.
Glyn said: “Global risks are rising – growth prospects have deteriorated, and a recession is now a possibility in many developed countries.
“Inflation is taking hold, living standards are being squeezed and government budgets are also under pressure.
“Against this backdrop, it’s easy to see why March saw the largest net outflows from equity funds in almost six years and why bond funds are out of favour too.”
Global equity funds took the biggest hit, with a net £992m in outflows, Calastone analysts found.
Alongside this, the UK had its 22nd consecutive month of outflows, a theme of “continuing investor disenchantment” with the region, according to Glyn.
It is worth noting that for once the UK was not alone, with every geography experiencing outflows following the Ukraine crisis.
However, while the UK’s unpopularity persisted, there was a different dynamic to the outflows in March, as the value of capital withdrawn fell to its lowest levels in seven months. This was mainly because the UK large-cap market is populated by major oil and commodity stocks, which have rallied as commodity prices surged on the back of Russia’s attack.
These two assets are intrinsically linked to Russia and Ukraine, because they are both major global suppliers of many commodities.
Glyn said that this dynamic has therefore “benefitted the very large oil and mining companies listed in London”.
He added that the UK equity market had been lagging its peers for sometime “so investors looking to take profits from their equity holdings have found better opportunities to do so elsewhere”, contributing to the lower level of redemptions.
One final area which also had a tough month was fixed income, which experienced its second worst month since the Covid pandemic began.
The asset class saw net outflows of £274m in March, admittedly not as bad as February’s total, but it was the second month since the pandemic began that bond funds suffered a net withdrawal of cash.
The Calastone analysts said this was because inflationary pressures were increased by the rising energy prices. “This is making investors wary of fixed income funds,” they said.
Looking at whether these redemptions were driven by a strong sell-off or a lack of buying, Calastone analysts said it was a case of the former.
“The value of sells rose by £963m month-on-month, while buy orders fell by £608m,” they explained. “This indicates active decisions to pull money from the markets, rather than a simple buyers’ strike being the main driver.”
Glyn added: “The recovery in share prices suggests the redemptions from funds were poorly timed, though the biggest outflows came after stock prices had recovered the worst of their losses.”
This confirms the view that “market timing is a dangerous game.”
One of the few positive pockets for equity markets in March was environmental, social and governance (ESG) funds, which continued the theme of driving any global equity inflows, albeit at a subdued level.
The report stated that “amazingly, ESG equity funds came away relatively unscathed”, with inflows of £136m, although this was the lowest levels of inflows in the past two years, indicating the theme had not been totally immune to the widespread caution from investors.
Indeed, over the past 12 months the average monthly inflows into ESG products was £798m, but March’s total was “notable for its stark contrast to the sharp outflows from equity funds overall,” Calastone analysts said.