Calastone: UK-focused equity funds shed £826m in May as investors seek inflation hedge

Equity funds collectively lost £310m of capital last month, taking the net outflow year-to-date to £877m. This is the worst start to a year on the Calastone fund flow index’s eight-year record and contrasts to net investment of £9bn in the first five months of 2021.

May’s £826m net selling from UK-focused funds extended outflows to a record twelve-month streak, longer than for any other segment in the market. Moreover, the three worst months on record for UK equity funds have been in 2022 alone.

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UK smaller companies took the hardest hit, accounting for £1 in every £6 of the May outflow, double their share of UK equity assets under management.

“In the short-term, UK-focused funds are the largest category by assets under management, so they are an obvious first port of call for investors wanting to reduce equity exposure, even though the UK index has proved resilient this year,” said Calastone head of global markets Edward Glyn. 

“But this is also part of a long-term trend that has seen investors opt to diversify their holdings away from a UK stock market that is highly concentrated at the top end and exposed to a lacklustre UK economy at the bottom.”

UK-focused funds were not the only ones experiencing heavy outflows. European equity funds had their worst month of the year, shedding a net £389m, while Asia-Pacific and regional funds also saw significant exits.

Global funds were the only geographical category to see notable inflows (£659m), with ESG strategies accounting for £8 out of every £10. Equity income funds saw their second consecutive month of inflows last month, bringing in a net £36m in new cash. 

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“The turnaround for equity income funds reflects the relative inflation protection that income-generating stocks provide. This has held true during 2022’s market convulsions – yield stocks have outperformed this year and investors are noticing,” said Glyn. 

The difference between ‘regular’ equity funds and their ESG counterparts is significant. The former has seen redemptions worth £3.7bn this year, while the latter has had inflows of £2.8bn.

Thanks to a perceived inflation hedge, property funds may be at a turning point. Net redemptions dwindled to just £8.1m, the lowest level since outflows began in 2018.

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