Investors remained cautious in November as they favoured money market funds over any other sector, according to new data from Calastone.
Inflows into money market funds reached £525m last month, which means that the sector has absorbed £4.1bn year-to-date. This is more than the combined £3.5bn over the previous eight years.
Edward Glyn, head of global markets at Calastone, said: “It’s clear investors are very cautious. There is a lot of concern that higher interest rates have not yet taken their full effect to suppress demand, which would impact company profits and therefore share prices.
“The returns on low-risk cash-focused money market funds are now better than at any time since the global financial crisis, providing an attractive alternative magnet for nervous investors – with inflation falling, these returns are even turning positive in real terms now too.”
Money market funds, which are considered the least risky category of funds available, received more than twice the amount that went into fixed income funds last month.
Nonetheless, investors added £256m into the sector as bond yields had their first sustained decline in November after a six-month period of increases, which pushed down prices.
Inflows into equity funds reached £449m last month after six months of net selling. This is, however, just a tenth of the net £4.5bn that investors withdrew between May and October.
Global equity funds were the most popular as investors poured £802m in. The continued resilience of the US economy also drove £481m of new capital into North American equity funds, while emerging markets funds attracted £414m and Japanese funds £111m.
The other way around, investors shunned Asia-Pacific, European, UK, income funds and infrastructure.
For instance, Asia-Pacific funds suffered their second highest level of outflows on record as investors withdrew a net £229m from the sector in November. The record outflow was recorded in August 2022 when investors removed £234m from Asia-Pacific funds.
As for UK equities, they experienced their 30th consecutive month of outflows, with investors withdrawing £330m from the sector. It is, however, their best reading since March 2023.
Glyn said: “Equity prices duly rebounded during the month, pushing the global index within a whisker of its high point for the year. This has tempted investors back into equity funds, favouring those parts of the world with better growth characteristics, such as the US, and those that benefit when US interest rates start to fall, like emerging markets.
“The surge in interest in Japanese equity funds reflects the flurry of excitement that Japan may finally be shrugging off its long stagnation. Regions such as Europe, Asia and the UK, which are suffering a weaker outlook remain out of favour.”
Elsewhere, mixed-asset funds suffered a record outflow of £1.6bn. Calastone suggested that investors are questioning the ability of those funds to offer a superior risk/reward profile when bonds and equities are moving in tandem.
Property fund outflows also rose in November, reaching £88m. This is the second-worst month of the year for the asset class after August when investors withdrew £121m from the sector. It is also a sharp month-on-month increase after October’s £52m outflow.
Glyn explained that property faces a triple squeeze of weak tenant demand resulting in commercial property rental growth lagging behind inflation, high market interest rates leading to falling capital values and high finance costs eating into profit margins.
He added: “Capital is in shorter supply too as investors who have spent a decade or more starved of income now have a multitude of high yielding alternatives acting as a magnet for their cash.
“Until we see a decisive turn in the UK’s growth prospects, commercial property is likely to continue to struggle.”
Investors also appear increasingly sceptical about environmental, social and governance (ESG) funds, which suffered their seventh consecutive month of outflows in November.
Investors withdrew £524m of capital from ESG-labelled funds last month, which takes total outflows since May to £3.7bn. It compares to just £431m for non-ESG equity funds in the same period.
The only outliers are ESG funds investing in emerging markets as they continue to attract inflows as part of a wider trend of record inflows into emerging market funds in general. Conversely, ESG funds focusing on North America and the UK have suffered the biggest outflows.
ESG fixed-income funds have also experienced outflows for nine months in a row, as investors withdrew £483m from the sector. This contrasts with £2.9bn of inflows into non-ESG fixed-income funds.
Glyn said: “The [Financial Conduct Authority] FCA is now taking action to counter allegations of greenwashing in the ESG sector, but investors are way ahead of them – they have been voting with their feet for seven months now by selling down ESG funds.
“The FCA’s action is likely to cast a further pall over the sector in the months ahead, however, and we will be monitoring the extent to which fund flows react.”