US exceptionalism, stock market highs and excitement surrounding artificial intelligence (AI) encouraged UK-based investors to pour their savings into US equity funds last month.
North American equity funds took in £2.5bn, breaking records for the third consecutive month, according to Calastone’s Fund Flow Index. Most of the inflows (£1.9bn) were committed to funds with environmental, social and governance (ESG) mandates.
Technology stocks, which have led the US equity rally, are heavily represented in ESG funds which might explain investors’ enthusiasm, said Edward Glyn, head of global markets at Calastone.
January 2024 marked an all-time high for ESG fund inflows and February was the fourth best month on record, netting £1.5bn across ESG funds investing in all geographies. European ESG funds took in £363m although European equity funds without ESG credentials saw a small outflow.
UK-based investors committed £2.7bn to equity funds in February 2024 – more money than in any month since May 2021, and the fourth best month in the past nine years.
February 2024 was the fourth consecutive month of equity inflows, reversing a trend spanning the previous 18 months when risk-averse investors spooked by interest rate hikes pulled £8.6bn out of equity funds.
Risk appetite and renewed confidence did not extend to UK stocks, however. British investors shunned domestic equities, withdrawing £633m (in line with the average monthly outflows seen during the past couple of years) and they pulled £229m from Asia Pacific equity funds (their third-worst month on record). “Asia Pacific remains stuck in China’s doom loop,” Glyn said.
Bond funds brought in £329m, making February 2024 their best month since June 2023, although inflows were in line with the long-term average for this asset class.
Money market funds took in £78m – a mere trickle compared to the £400m monthly average during 2023 when investors were seeking safe havens, as well as the relatively high yields available from cash.
Glyn said: “Risk is back on with a vengeance. Investors are going cold on safe havens and jumping back into equities feet first.” He sounded a warning bell to equity bulls, however, accusing them of “ignoring developments in the bond markets”.
“Fears both that inflation may prove too sticky and that spendthrift governments simply haven’t got the will to curb their deficits have pushed yields back up in recent weeks – and bond prices therefore down. These higher yields are bad for equity valuations but they haven’t touched the sides of the bull run,” he pointed out.
“For their part, bond investors are adding modestly to their fund holdings – locking into today’s higher yields and hoping for capital gains if and when the market rallies.”
Mixed asset and property funds were out of favour. “Property funds continue to suffer structural outflows as the property investment industry turns away from the open-ended wrapper,” Glyn explained.