Investors poured £1.1bn into equity index funds in September, with global index funds the main recipients, according to Calastone, reversing the fortunes of passive funds, which have lagged their active counterparts in recent years.
However, index funds still lag their active rivals year-to-date, with the former receiving £5.4bn of inflows and the latter £7bn.
Investors continued to back global funds last month, which attracted inflows of £981m in September, while they also added £284m into emerging markets funds, taking the year-to-date total for the sector to £2.4bn.
Edward Glyn, head of global markets at Calastone, said: “Inflows to emerging markets in 2023 reflect attractive prices after very steep falls from their 2021 peak and accompany calmer emerging market bond yields this year.”
In spite of this, investors withdrew £206m out of equity funds overall in September, which is the fifth consecutive month of outflows for the asset class. This is, however, the least severe level of outflows since February this year.
UK funds suffered a 28th consecutive month of outflows, with redemptions to the tune of £448m. As such, it is the sector that shed the most in September.
Investors also withdrew £285m from the North American sector. Relative to their overall size, North American funds have been hit 40% harder by outflows over the past three months.
Glyn said: “The distaste for UK equities is a structural trend that domestic and international investors are unwilling to break, despite attractive valuations, but outflows from North American funds only began in earnest with the bear market in 2022.
“Highly valued US equities, especially in the technology sector, are especially sensitive to rising bond yields – fund flows in and out of US equity funds have followed moves in the bond markets lately.”
Meanwhile, environmental, social and governance (ESG) funds suffered their fifth consecutive month of outflows, with investors redeeming £485m from their ESG equity holdings. Yet, almost half of those outflows came from North American ESG funds.
Income funds also shed £594m, their second-worst month of the year after August.
In the fixed income space, bond funds were impacted by volatile conditions, with investors withdrawing £128m. Yet, safe-haven and high-yielding money market funds attracted £189m of new capital.
Glyn added: “The bond markets are in the driving seat at the moment. One moment, inflation coming in better than expected or central banks hitting pause on interest rates causes a bond market rally. The mathematical alchemy that links bond yields to stock market valuations, as well as investor hopes for a soft economic landing, give equities a boost.
“The next moment, policymakers take the punchbowl away with a warning that rates will stay high for the foreseeable future - bond yields surge and equity markets sag. Clear signs of sustained disinflation accompanied by a definitive turn in the rate cycle seem to be top of the wish list for market bulls at present.”
Mixed asset funds lost £1bn, which is their worst month on Calastone’s record. This is also the fifth month of net selling for the sector and is the longest run of outflows from mixed asset funds recorded.
Between 2015 and 2021, mixed asset funds suffered from outflows in only three months. By contrast, the sector has experienced 11 months of net selling since the beginning of 2022, five of these since May this year.
Glyn said: “The objective with mixed asset funds is to exploit the traditional inverse correlation between equities and bonds to generate better risk-adjusted returns. The trouble is that bond and equity markets have moved largely in tandem in the last eighteen months or so which is leading investors to question whether they can do better elsewhere for a similar risk profile.
“This reappraisal is clearly driving investors out the door. Mixed asset funds used to enjoy steady inflows month in, month out, as investors had them cemented into savings plans, but this no longer seems to be the case.”