Investors Back Equities over Bonds in Sluggish February

Fixed income funds reach the highest outflows since the start of the pandemic in another slow month for the UK fund industry

Sunniva Kolostyak 16 March, 2022 | 10:17AM
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Up and Down Arrows

In January, price corrections drove people away from equities and towards fixed income, but the trend has since reversed.

Overall, Morningstar data reveals £751 million was added to UK domiciled open-end funds in February, which is up from £443 million in January. However, most of the inflows went into lower-risk money market funds, and if you exclude those, funds only attracted £159 million (compared to £143 million in January).

So fund flows remain low, but investors have moved their attention away from fixed income funds, which saw their highest outflows since March 2020, to equities.

Fixed income lost nearly a billion (£912 million) last month, after attracting £17 billion over the past 12 months. Morningstar’s manager research analyst Bhavik Parekh notes these funds generally see very small outflows. The majority this month came from investment-grade, high-yield, and/or strategic and dynamic bond funds.

“Cooling markets in 2022 led by central-bank tightening, inflation owing to a normalising world economy, and concerns about the Russia-Ukraine conflict meant investor sentiment was generally low,” Parekh says.

“Strong inflows into money market funds are an indication of the general unease of investors, given their lower risk profile.”

Equity funds attracted £1.5 billion last month, meanwhile, but that was largely due to lump sums into a trio of institutional pension funds: BlackRock's ACS Climate Transition World Equity, LF Access Global Equity–Macquarie, and FP Brunel's Global Sustainable Equity. If it weren’t for those three, total outflows for February would have reached £2.2 billion.

Overall, passive vehicles saw outflows and active ones saw inflows – largely due to the three previously mentioned equity funds.

Sustainable funds continued to bask in investor popularity, despite the recent underperformance of these so far in 2022 owing to their relatively low weights in the energy and natural resources sectors.

The sector equity ecology category had the second highest inflows this month, and it is a heavily featured category in the top five for inflows on a monthly basis. The biggest fund in the category, BlackRock's Climate Transition strategy, attracted £1.2 billion, but a new UBS fund, UBS Global Equity Climate Transition, also attracted £302 million.

Digging further into category popularity, global large-cap growth and blend did well, again because of the large pension funds. If it weren’t for these, the growth category would have had large net redemptions. The main loser in the category was UK’s largest fund, Fundsmith Equity, which after its worst month of performance in January saw £231 million of outflows.

Despite performing well on a relative basis to other geographies in 2021, UK equities have continued to see heavy outflows. Three UK equity categories were in the bottom five for net flows, with large-caps losing £1.2 billion.

Vanguard had its worst month on record for UK-domiciled funds. The fund group has had remarkably consistent inflows over the past 10 years, but there was a big outflow in February, as detailed in our chart. According to our analysts, the large net redemptions from its FTSE All-Share tracker were the main cause of this, but the US equivalent and Vanguard UK Long Duration Gilt Index also saw reasonably large net outflows.

Fidelity did reasonably well due to a single client investing a significant amount into it Fidelity European strategy. Meanwhile, Baillie Gifford experienced net redemptions for a third consecutive month, the first time that has happened since 2015.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Sunniva Kolostyak  is data journalist for Morningstar.co.uk