UK Equity Funds Weather Market Turmoil Surprisingly Well

Fixed income unexpectedly takes brunt of record monthly outflow of UK mutual funds.

UK-based mutual funds had their largest outflows on record for any month by far in March as investors redeemed £3.1 billion ($3.9 billion) in fund holdings, according to global funds network Calastone. This is nearly three times the previous monthly record, which took place during June 2016 when the United Kingdom voted to leave the European Union.

Despite the stock markets tumbling by as much as 25% during the month, it was fixed income funds—not equity funds—that took the brunt of the retreat. At the end of the month, an unheard of £3.7 billion left fixed income funds, which was 13 times more than the previous record, which occurred in January 2019. In contrast, equity funds only saw £244 million of outflows for the month.

“Outflows in March wiped out accumulated inflows from the preceding eight months,” said Calastone, which measures UK investor sentiment with its Fund Flow Index (FFI). “Investors reacted to sharply widening yield spreads as a focus on credit quality highlighted the risks that weak sovereign borrowers and corporates with overstretched balance sheets may find their debts unsustainable.”

During the month, fund flows swung wildly from week to week as the beginning of the month saw buying, the middle saw indiscriminate selling, and the last few days saw selective buying in growing volume.

Calastone also said that investors were “spooked” by technical factors causing an acute dollar liquidity squeeze that required coordinated central bank remedies, and that quarter-end portfolio rebalancing drove bond sales. The fixed income FFI fell to an unprecedented 30.4, which means that selling activity was more than twice as much as buying.

“The temporary loss of fixed income as a safe-haven asset class to counterbalance some of the huge losses in equity markets left investors with little option but to ride it out or park their money in cash or cash-equivalents,” Edward Glyn, Calastone’s head of global market, said in a statement. “Equally, the courage of investors not to dump their equity holdings is surprising,” he said, adding that “the COVID-19 crisis has undoubtedly had a bigger impact than the EU referendum shock, yet so far equity funds are weathering the storm rather well.”

Funds focused on UK equities drew £508 million of new capital, which was their second-best month in four years, with only December 2019 seeing higher traffic.

Investors fled active funds, which reported their second-worst month on record with £1.7 billion in outflows, and they sought shelter in passive funds, which saw record inflows of £1.4 billion during the month. European equity funds suffered their second worst outflow on record, losing £500 million, while global funds saw inflows.

Glyn said that while the sharp divergence between passive and active funds can be partially explained by the growth of index investing and monthly direct debits, these factors aren’t enough to account for the huge disparity in March.

“It seems investors attempting to catch market troughs may simply be focusing on timing and just relying on the index to do the rest,” Glyn said. “But, in fact, active managers tend to do rather well in difficult times for stock markets so the big outflows from that segment at a time of such big inflows to passive funds are a little surprising.”

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