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Calastone: Rising equity prices fuel further fixed income flows

According to Calastone research, rising equities prices have caused fund withdrawals as investors shift to fixed income products.

In February, investors withdrew €654.9 million from equities funds, with UK funds bearing the brunt of the pain.

Domestic investors, in particular, avoided UK shares throughout the month, despite the FTSE 100 index reversing the year-long trend of dropping asset prices. UK investors withdrew €1.08 billion from UK-focused stock fund holdings, making it the sector's third worst month on record.

Calastone's head of global markets, Edward Glyn, stated that a "structural diversification" is taking place to lessen the "quite strong exposure in UK investor portfolios to UK-focused funds."

He continued: “The general air of pessimism over the UK’s economic decline, weak government finances, political chaos, and rising corporate taxes seems to have accelerated this trend with consistent outflows from UK funds and inflows to global ones.”

The 21st straight month of outflows from UK-focused equities funds occurred in February 2023. European equities had their 17th straight month of withdrawals, with investors withdrawing €281 million from the sector. Throughout the course of the month, global mandates garnered €1.21 billion. Significantly, conventional products attracted 57% of the inflow, rather than funds with an ESG objective.

The long-standing trend of asset allocation shifting from equities to bonds continues, but bond market inflows weakened in February as interest rate fears increased. Bond funds remained popular, generating a net €938 million inflow.

Glyn believes two causes are at work, the first of which is that investors are fundamentally overweight equities following a long bull run since 2008.

He said: “Equity and bond prices have already suffered the value compression that comes with higher interest rates, leaving bonds offering the most attractive yields since before the Global Financial Crisis, as well as the prospect of capital gains if a recession bites and market interest rates fall.“

Meanwhile, equities are at risk from a second downturn if that same recession bites into profits."


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