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Calastone: High equity prices drive further fixed income flows

high, equity, prices, fixed income, flowsSoaring equity prices have spurred fund outflows as investors turn to fixed income products, according to analysis by Calastone.

Investors pulled €654.9 million from equity funds in February, with UK funds hit the hardest.

Domestic investors, in particular, shunned UK equities across the month, despite the FTSE 100 index bucking the trend of declining asset prices over the past year. UK investors pulled €1.08 billion from UK-focused equity fund holdings, making it the third worst month for the sector on record.

Edward Glyn, head of global markets at Calastone, said a “structural diversification” is underway to reduce the “relatively heavy weighting 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.”

February 2023 was the 21st consecutive month of outflows from UK-focused equity funds. European equities suffered their 17th consecutive month of outflows as investors pulled €281 million of capital from the sector. Global mandates attracted €1.21 billion over the month. Notably, the inflow was not driven by funds with an ESG mandate, with conventional products attracting 57% of the inflow.

The long-standing trend of allocations shifting from equities to bonds remains, but bond market inflows moderated in February as rate fears rose. Bond funds were nevertheless popular, attracting a net €938 million of inflows.

Glyn said two factors are at play – the first of which being investors being structurally overweight equities after a lengthy bull run post-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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