Equity fund inflows spike to five-year high on vaccine hopes
Active funds recorded a dramatic turnaround in Q4 2020 (especially December), with the best inflows in five years, based on vaccine hopes, according to global fund network Calastone’s Fund Flow Index. Investors have withdrawn cash from active funds in two out of every three months in the last three years, but this trend changed in November and December 2020, recording huge inflows totalling £1.5bn and £1.7bn, respectively.
December turned out to be the best month for active equity fund flows since July 2015. ESG strategies accounting for half of the new capital flowing into active equity funds in November and December, but active global, North American and European funds made up the rest. Despite this, active funds have shed £2bn of capital.
The coronacoaster year for equity funds ended on a high as rock-bottom interest rates and the prospect of mass vaccination boosted both stock market valuations and the appetite to hold shares, said Edward Glyn, head of global markets at Calastone. Index funds sold strongly throughout the year, with inflows totalling £8.1bn, with £19.7bn flowing into passive funds in the past three years.
The tide has turned for European equity funds, which saw two years of outflows until August 2020. Since then, £870m has flown into this asset class, more than half of it in December (best month ever for this category).
Markets with high growth characteristics like Asia, emerging markets and the US have benefited most from the uplift in valuations and this is reflected in fund flows too, said Glyn. “Those with low growth characteristics and a high yield, like the UK, have been left far behind both in valuation terms and fund flows. The UK’s particular difficulties handling the pandemic and Brexit have only added to investor distaste for UK assets,” he added.
Funds focussed on UK equities had a tough year in 2020, especially during the second half as the negotiations with the EU turned sour and the pandemic prompted cancellation of big dividends. Between June and December, £2bn left funds investing in UK equities while all other geographical categories enjoyed inflows totalling £9.2bn between them. The positive sign at the end of the year, with the UK-EU deal and the launch of vaccination programmes, saw a turnaround in appetite for UK stocks. December outflows overall were the lowest in months and the fund flows turned positive in the last five trading days of the year to the tune of £148m.
ESG funds brought in a record £1.1bn in a single month, roughly equivalent to the entire inflow from 2015-2018 combined. Two-thirds of the capital flowed into ESG equity funds, with ESG mixed asset funds and fixed income strategies selling strongly. Fixed income funds ended the tumultuous year on a high, with inflows surging to £1.2bn, almost double that of the November total, leaving Q4 with the best inflows since mid-2019. Property funds suffered outflows too but at a slowing pace.