UK equity funds suffered their second-highest outflows on record in May, with domestic retail investors withdrawing £1.1bn despite strong performance since late February, according to the latest Calastone Fund Flow Index.
Calastone attributed these outflows to profit taking after the recent rally. Edward Glyn, head of global markets, said: “While buoyant markets usually attract new capital, many investors have seemingly chosen the UK rally as an opportunity to jump ship rather than a moment to reappraise the UK’s prospects.
“The election announcement made no difference to selling patterns during the month – this is a long-term trend of selling, not a news-driven flurry.”
On the other side of the Atlantic, US equity funds took in £826m in May, which was six times the long run average but one-third lower than April’s inflows.
Equity funds with environmental, social and governance (ESG) principles garnered £581m in May, with most of this money going to North American strategies.
“The heavy weighting of many US tech stocks in ESG funds helps explain why this is happening,” Glyn said.
“If we exclude North America, ESG-compliant funds have continued to suffer outflows in recent months. So what is going on? Investors can obviously buy funds that only invest in technology stocks though these are small in size, but they may be picking North American ESG-compliant funds as an alternative route to tech exposure.”
Global equity funds raked in £1.4bn and European equities attracted £462m in May.
Meanwhile, fixed income funds were hit by outflows for the first time since October 2023 as inflation data in the UK and US disappointed markets, rate cut expectations were pushed out further and bond yields remained high. Net outflows of £643m marked bond funds’ worst month since March 2020 and second-worst month during Calastone’s almost 10 years of data.
“The prospect of interest rate cuts in the US and the UK has receded yet again, with only the European Central Bank likely to move in the short term. Bond yields are approaching once more the post-global financial crisis highs they reached in late 2023, pushing down bond prices as they have climbed,” Glyn said.
“If you are confident rates will fall, then it’s possible to lock into these high yields for a very long time through fixed income funds, but the see-saw of hopes and fears over rates has finally led some investors to call time and withdraw capital for the first time in months, choosing instead to take refuge in cash or money markets.”
Indeed, investors moved £143m into safe-haven money market funds in May to access the relatively high yields on offer before central banks cut rates. Mixed-asset funds, however, suffered outflows of £531m.