05 September 2019
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Data published by transaction network Calastone suggest that net flows into UK funds in August fell to their lowest level since December 2018, and their second-lowest level in three years, meaning UK investors added some £640m to their holdings through the month, well below the long-term monthly average of £2.4bn.
The Calastone all asset Fund Flow Index (FFI) fell to 50.8, barely above the neutral 50 mark during the month.
As has been the case recently, Calastone linked the flow trend to concerns around Brexit, noting that there was a spike in outflows from UK equity funds when the UK government announced it would shut down Parliament - in a so-called prorogue - for several weeks, thereby limiting the ability of Parliament to resist a no deal Brexit by 31 October. That spike accounted for a quarter of net sales experienced by UK equity funds over the month.
There is scant evidence that a summer season lull in volumes caused the outflows, Calastone adds, as "the total volume of trading was well above the average for the year-to-date and for the last few years".
Equity funds generally struggled as investors sold down some £525m of their holdings, Calastone noted, adding that UK equity funds accounted for some 60% of total outflows in the asset class - £306m sold - which the index puts down to "increasingly cheap UK valuations in growing alarm at political developments in the country and as the economic news darkened".
The FFI reading for UK equity was 46.3, well below the neutral mark. Calastone also notes that equity income funds largely invested in UK shares experienced the 28th month in a row of net outflows.
European equity funds saw net outflows of some £230m, although global and North America funds saw "modest inflows".
Property, or real estate funds experienced their biggest net outflows of any month so far in 2019, shedding some £334m on this basis.
And fixed income funds saw net inflows drop by more than 80% month-on-month, ot just £211m - although the fact they accounted for one third or all net inflows meant that they actually took in money well above the long-term monthly average share of the total.
In contrast, UK capital continued to flow strongly into funds domiciled in the EU.
"While UK-UK funds inflows of £640m across all asset classes were three-quarters below their post-referendum average in August, UK-offshore funds enjoyed £1.6bn of inflows, only a tenth below average over the same period," Calastone noted.
Edward Glyn, head of Global markets, said: "Confidence is ebbing away, and investors are voting with their feet. Only the lowest risk categories of funds saw inflows in August. Even though equity outflows were a little smaller than in July, they were still strongly negative, with UK assets suffering the worst. UK political risk now combines with economic risk, so almost no matter how cheap UK asset valuations become relative to peers elsewhere, there is little appetite to buy them. The inversion of the UK yield curve, which signals the possibility of recession ahead, has only intensified concern. The flow of funds offshore expresses a further dimension of aversion to the UK - this is not about the asset classes those funds are invested in, but more about investor concerns over how the UK regulatory environment will handle the disruption caused by Brexit."
"Fixed income funds have been benefitting from the flight from risker assets, but the sharp drop in inflows in August is an acknowledgment that even this perceived safe haven may not protect capital when bond prices are so high and yields in some parts of the world negative, including at the long end of the curve."
