Fixed Income Still Captures Investors’ Attention

Fixed Income Still Captures Investors’ Attention

No respite in sight for equity funds. Investors pulled more than £1 billion out of the category last month, with UK equity classes leading the way.

According to the most recent data from Morningstar, outflows from equities persist and these funds have yet to see net inflows this year. During our Q1 review last month, we noted that over £2 billion had been withdrawn. This now amounts to up to £3.37 billion for equity strategies.

But the month has not been all bad. Fixed income funds and money market funds are both seeing capital inflows, although they are the only two categories to do so. It’s also the first month of overall net inflows into UK open-ended funds since January, and passive strategies are increasing the margin of popularity between themselves and their active counterparts.

However, smaller fund categories continued to experience outflows. Allocation funds saw moderate redemptions of £123m, bringing the annual total to £1.33bn. Outflows from property strategies remain marginal but consistent at £159m in April and £365m so far in 2023 overall.

That said, April’s grand total is positive. It was mainly bond funds and money market funds that made a positive contribution to the overall fund flow figures this year. This month they were also responsible for ensuring UK funds were added net of £815million. The year as a whole is still negative with £2.36bn of releases, but April is the first month since January with positive overall figures.

The Morningstar Category GBP Corporate Bonds proved to be the most popular and a big driver for fixed income inflows. It was also the only category with entries over £1 billion, with £1.18 billion. Gilts were also popular – £420million was invested GBP government bond funds in April.

Global And U.S. Large Cap Blend Equity the categories were equally popular – both are in the top five with strong monthly and year-to-date entries. However, this was not enough to save the equity category from net outflows. Four of the last five categories are UK equity strategies. The fifth is the UK allocation.

UK large caps saw withdrawals worth £888million in April, taking the annual outflow figure above the £3billion mark. The category is then followed by UK Equity Income with a more moderate amount of £320 million and UK Flex-Cap Equity at £271m. The latter two both have year-to-date releases in excess of £1bn.

UK income categories have struggled to gain popularity lately, as Morningstar investment research analyst Michael Born explained in a recent video. With growth leading the way over the past decade and the UK out of favor after Brexit, investors have looked elsewhere.

In terms of valuations, Born said some of the stocks these funds invest in look “exceptionally cheap.” But the outlook remains volatile. “Some valid risk could be driving some of these prices (…), but they certainly look optically cheap. Based on that, I think they look quite attractive.”

In the various fund houses, black rock, Avant-gardeAnd Baillie Gifford see net entries, while loyalty, abrdn, SchrödersAnd Columbia Threadneedle see outputs.

The month’s largest fund for inflows was the Baillie Gifford Investment Grade Bond fund at £778m. This was followed by two of BlackRock’s iShares funds, both with subscriptions of around £280m.

Passive funds continue to be popular. Along with the iShares range, we find Vanguard’s UK All Share in the top five, attracting £244m. A total of £2bn was added to passive strategies in April, while active funds saw £1.19bn removed.

With these flows, Jack Fletcher-Price, associate manager research analyst at Morningstar, points out that the gap between assets and liabilities has exceeded £15 billion this year. Passive funds now stand at £6.34 billion in net inflows and assets at £9.16 billion in net outflows.

Finally, the most unpopular fund was also a passive strategy: the gold-rated iShares UK Equity Index Fund with redemptions worth £341m this month and £783m this year .

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