UK equity flows turn positive

April, 2021 Print

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UK-focused equity funds recorded their first net inflows in eight months in February, despite investors giving a lukewarm reception to the government’s roadmap out of lockdown.

Investors added £145 million to their portfolios, according to Calastone’s Fund Flow Index, a reversal in the eight-month stint of outflows, second in duration only to the EU-referendum period.

However, investors pulled £19 million in capital from UK equity funds during the final week of February.

North American funds saw their first outflows since March 2020. The net figure for the whole month was just £10 million, but a jump in bond yields during the second week of February prompted net selling of £238 million.

Rising bond yields and the falling US dollar are the big stories in global markets at the moment, said Edward Glyn, head of global markets at Calastone.

“For a US market dominated by extremely highly valued tech stocks, rising bond yields are a clear and present danger – with so much of their value tied up in their future prospects, a higher cost of money (or discount rate) is very bad for share prices of these giants. Outflows are the inevitable result,” he said.

Outflows from European funds seem more linked to the shambolic vaccine rollout that will prolong lockdowns, added Glyn.

“Sentiment on UK equity funds is also going to remain closely linked to the recovery from the pandemic and whether the cautious plan to lift lockdowns starts to slip,” said Glyn. “UK funds have been so out of favour for so long that some rotation is clearly taking place now too.”

The big winners were emerging market and Asia-Pacific funds that each had their second-best month of inflows on record, at £177 million and £215 million, respectively.

Rising energy prices have also attracted inflows to sector funds focused on energy and alternative energy. ESG equity funds once again saw strong inflows.

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