Investors added £1.13 billion to UK funds in May, but most asset classes saw outflows, according to fresh Morningstar data.
Over the past month, we see the same trends we’ve seen all year continue, such as inflows into fixed income, and outflows from allocation, equity, and property strategies.
The most recent report also shows investors moved significant sums into money markets – enough to offset what would have been overall net outflows for UK funds.
Money market funds saw £2.32 billion added but if these figures if excluded from the overall numbers, net flows would be negative £1.18 billion.
The May figures are largely aligned with that of previous months this year just at a lower level. Flows in and out of money markets have come and gone but fixed income is clearly the winning theme this year. The modest £314 million inflow brings the total for 2023 up to £2.30 billion, the largest total of any category this year.
The influx into fixed income we’ve seen this year might be a response to a decade of super-low interest rates, Michael Field, Europe market strategist at Morningstar, explains, with investors now rebalancing their portfolios.
"People have been probably overly invested in equities for quite a number of years now," he says. And for good reason: with interest rates near zero and bonds offering 50 basis points at best, equity returns and dividends on UK stocks offered more capital upside.
"Now, we’ve entered a period where equities are valued pretty highly, still, and on top of that, fixed income is suddenly yielding you a lot more than you did before.
"Inflation is also super high, and interest rates going up is going to negatively impact businesses and corporate profits as a result, and the ability to pay dividends. Suddenly, that picture looks a lot better in terms of safety and income investing in bonds instead.
He adds, however, that this may not be a bad move – when tracking fund flows, we often see investors moving money to funds that at the time are perceived winners, before another "losing" fund suddenly captures a trend and outperforms (and the cycle continues).
This time, the equity markets are still performing relatively well, i.e. it could be a good time to sell high. With fixed income, if you hold the bond until maturity, you’re not necessarily taking on a lot of risk.
Field says: "I think the danger of someone totally messing up and selling a winner to buy a loser doesn’t exactly work in this case – you’re changing asset classes, not (for example) two equity funds. In this instance, I think people have probably got it right to some degree."
GBP Money Market - Short Term became the most popular Morningstar category overall with almost £2 billion in inflows in May. This was largely due to Federated Hermes S-T Sterling Prime’s £1.33 billion subscription, the largest in May, and the second-largest net flow figures, worth £404 million, which went into fellow category fund Royal London Short Term Money Market.
Beyond money markets, the top five featured two equity categories: Global Large-Cap Blend and US Large-Cap Blend. On the bond side, GBP Government and Global Bond had the highest inflows.
Among the five most unpopular categories we see GBP flexible allocation with the largest outflows, but it’s a much closer list in figures than the top five, with four of them reaching redemptions larger than £500 million.
It’s UK equities that struggled the most here, specifically Large-Cap and Flex-Cap. The former of the two has now seen more than £5 billion withdrawn in 2023 (for reference, the category is worth £114 billion). Royal London UK Core Equity Tilt’s £451 million redemption was the largest among all funds, but the fund house has another fund in the bottom as well (Royal London UK Opportunities, from the Flex-Cap category).
In the report, Morningstar’s associate analyst Jack Fletcher Price notes May was a rare month that saw inflows to non-sustainably labelled funds and outflows from sustainable by prospectus – the opposite of what we normally see, as shown in the chart above.
Meanwhile, non-sustainable funds this time saw inflows worth £1.67 billion. Sustainable funds leaked £557 million.
On a fund house level, BlackRock, Abrdn, Vanguard, and Schroders overall attracted new money, while Royal London, Fidelity, Baillie Gifford, and Columbia Threadneedle saw net outflows. We will be back next month to round up the asset flow trends of the first six months of the year.
