Investors are still recovering from the sell-off that hit global equity markets in October and new research by global funds transaction network Calastone shows that UK investors were spooked from putting their money to work during the month.
The Calastone Fund Flow Index, which launched earlier this week, aims to act as a measure of sentiment for UK investors by analysing the net inflow and outflows of capital to and from open-ended investment funds.
The index is designed to show more than just how much money went into or left a fund over a given period. Instead, it looks at flows relative to the total value of units bought and sold in those funds.
An index reading of 50 indicates that new money into funds equals the value of redemptions from them; a reading of 100 would mean all activity was buying while a reading of 0 would mean all activity was selling. Therefore, £1m of net inflows will score more highly if there is no selling activity than if the £1m was merely a small difference between a large amount of buying and a similarly large amount of selling.
Calastone Fund Flow Index all assets 2015-2018
Source: Calastone, Investment Association
The above chart shows the evolution of fund flows across all products open to UK investors over the past three years. Sentiment was positive in 2015 when £29bn flowed into funds and the FFI All Assets index averaged 56.8 over the year, but the index dipped in 2016 when investors fretted over the Brexit referendum and US presidential election, languishing at 52.7.
However, the fund flow index shows a surge in 2017 as the bull market returned. Calastone noted that almost as much capital flowed into funds in the fourth quarter of 2017 alone as in the whole of 2016. The index ended 2017 at 59.7 points.
Data for October 2018 – the first time the group has published the index – shows that sentiment has been hit hard during the course of the past year.
“This year, the FFI All Assets trend has been downwards, falling to 51.6 in October, its lowest level in two years. Net new capital has continued to flow into funds, but at a slower rate than last year, and with increasing caution. Year-to-date, investors have committed a net £29.9bn to funds, a fifth lower year-on-year,” Calastone said.
“The slowdown has intensified recently: in the last five months, inflows have been half the level seen in the same period of 2017. October was the weakest of all. It saw inflows a touch under £1.1bn on very high two-trading volumes, comfortably the lowest level since late 2016.”
What’s more, the research shows that as well as pouring less money into funds, investors appeared to have become more risk-averse during 2018.
The Calastone Fund Flow Index categorises funds in different risk buckets. The riskiest fund categories are dominated by pure equities while funds categorised as low risk include a greater share of fixed income and lower risk mixed asset funds.
Calastone Fund Flow Index by risk appetite
Source: Calastone
On average, the riskiest fund bucket has posted a score of 53.2 in Calastone’s index since 2015, suggesting that investors recognise the potential for superior capital growth over the long term. However, they pull back from these funds in times such as 2016’s Brexit referendum and during 2018’s renewed turmoil.
“This year, confidence in riskier funds has trended steadily downwards as concerns over stock market valuations have deepened, trade tensions have intensified and market volatility has risen,” Calastone said. “In the last three months, inflows to riskier funds have fallen by two-thirds compared to the spring.”
But as the chart above shows, the lower risk bucket has also taken a dip this year. These funds have an average index score of 59.8 since 2015, reflecting consistently strong inflows as they tend to be less affected by market events.
“In 2018, the FFI for low-risk funds has trended down. It even dropped below 50 in October (thanks to the outflows from bond funds). This decline doesn’t mean investors are avoiding low-risk assets, however,” Calastone said. “Overall fund inflows have been falling sharply since May, and that means investors are simply leaving their cash in their bank accounts, rather than exposing it to any kind of market risk at all.”
A look at how the money flowing into funds is split according to risk appetite shows just as clearly how investors are avoiding higher risk products. The share allocated to riskier assets has dropped from almost half of all inflows in March 2018 (when investors took advantage of a dip in the markets) to less than a quarter in October.
On a sector level, the Calastone Fund Flow Index shows that investors have favoured global funds over UK equities since UK Brexit referendum. Global equity funds have only seen minor outflows three times in almost four years; by value, global fund holdings are now second only to domestic equities among UK investors.
However, they were hit hard last month: “In October, net inflows to global funds dried up to almost zero, despite two-way trading volumes in this category being the largest on the index’s record.
“The dominance of US equities in many global funds and US stocks very high valuation compared to historical norms helps explain why investor sentiment around global funds has cooled when the US market led October’s correction. Pure North American equity funds saw outflows in October.”
As noted above, UK equities remain the largest allocation of the typical UK investor but the asset class has been decidedly out-of-favour since the country voted to depart the EU. Investors have added a mere net £12.4m to their UK equity holdings since the beginning of 2015 and the FFI UK Equity has averaged just 50.0 in that time.
Calastone Fund Flow Index by geography
Source: Investment Association, Calastone
“In October, UK equities bucked this trend with £244.2m of net inflows, as investors judged during the market volatility that UK shares looked good value compared to global peers,” the research noted. “Buying of UK equities only began during the October EU summit, as investors became more optimistic on a Brexit deal.”
That said, the overall message from the fund flow index is that investors are reluctant about equities at the moment. The overall Calastone Equity Fund Flow Index reached 59.2 per cent in 2017, which was described as “very confident” but has sat only a little above the neutral line since May 2018 and registered just 50.6 points in October.
When it comes to bonds, funds focused on the asset class saw an acceleration of inflows it the second and third quarters of 2018 and the overall Calastone Bond Fund Flow Index was regularly in the high 50s. But this went into sharp reversal in October as money left bond products for the first time since early 2016 on the back of sharply rising yields.
The Calastone Mixed Assets Fund Flow Index tends to be more consistent than the equity and bond indices, reflecting the fact that mixed asset funds are stalwarts of regular savings plans. It has averaged 60.3 in 2015, well above other asset types, and has only fallen below 50 once – in January 2016, when investors were spooked after the FTSE 100 dropped 3.6 per cent in a single session.