War in Europe and inflation fears spark sharp surge in outflows for February

The war in Ukraine and fears about inflation have triggered a surge of outflows from equity funds and fixed income funds, according to global funds network Calastone.

Calastone’s latest Fund Flow Index (FFI) found that inflows into equity funds fell to £42 million in February, making it the second worst month for equity funds since July 2020.

Equity funds attracted inflows of £646 million until 23 February, but when Russia invaded Ukraine, investors pulled £604 million from funds in the month’s final three trading days.

Active funds focused on UK equities were hit hardest, shedding a record £830 million, while ESG funds continued to record inflows.

The FFI also reported that fixed income funds faced a significant setback as investors became increasingly cautious about rising inflation, prompting a month of outflows for the first time since March 2020.

During February, investors sold a net £517 million of their holdings, and as with equity funds, in thr final three trading days of the month, investors sold down a net £204 million of their holdings. However, the FFI reported there were outflows across the month, suggesting investors were motivated by increasing concerns over inflation.

For both equities funds and fixed income funds, outflows were caused by a lack of new buyers and buying activity, rather than by a flood of new sellers, according to Calastone.

For equities, the value of buy orders fell by 22% in the last three trading days compared to the month’s average, while the value of sell orders increased by 9%. Similarly for fixed income, selling activity was stable throughout the month, but buying activity dropped by over a third in the final days.

Property funds also saw sharply higher net outflows of £148 million in the month, due to concerns about rising interest rates and the war in Europe.

Edward Glyn, head of global markets at Calastone, said: “Stock markets have certainly fallen since the Russian army invaded Ukraine, but the falls have not indicated a rout.

“This is reflected in equity fund flows – buyers have gone on strike, rather than sellers going hell-for-leather, suggesting that caution is the name of the game, rather than a rush for the exits. Buyers have simply opted to sit it out on the side-lines for the time being.”

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