Investors flee equity funds as valuation concerns grow
Equity funds experienced their worst month of outflows since August 2022 in August, as investors shifted their cash into bonds.
UK investors withdrew a staggering £1.3bn from equity funds, following a withdrawal of £1.13bn in July, according to data from funds group Calastone.
Edward Glyn, head of global markets at Calastone said, “This summer, stock markets are ignoring a wide range of negative signals and have continued to reach new highs.”
“But fund investors are wary, fearing a correction is round the corner. Whether this caution is justified remains to be seen.”
UK equities suffer further losses
UK-focused funds continued their poor run. Investors withdrew £653m in August, following an outflow of £543m last month.
The UK has been the least favoured equity sector for all but two of the last 51 months, with outflows being a persistent trend.
This has been attributed to weak investor sentiment influenced by the repercussions of Brexit and, more recently, mixed reactions to the October 2024 Budget.
However, some analysts believe UK equities are beginning to regain momentum, as concerns over high inflation begin to recede and valuations become more attractive to foreign investors.
Global equity shock retreat
Global equity funds recorded their third consecutive month of outflows.
Investors withdrew £658m in August.
Global equity funds have traditionally been regarded as a safe investment option for investors, thanks to their sector diversity and broad market access.
This downturn was emphasised by global outflows exceeding the outflows of UK-focused funds.
However, Glyn believes this change will not be a permanent one.
He said, “This is likely to be a temporary phenomenon, and doubtless reflects scepticism around the sky-high valuations of global mega-stocks, especially US tech.”
“But global funds nevertheless save investors from having to pick regional winners and that will doubtless prove attractive again before long.”
Run for safety
Concerns over equity prices have also pushed investors to park capital in safe haven money-market funds.
Investors moved £633m to the funds, marking the strongest performance of inflows in two years.
Fixed income funds gave mixed signals however, recording an inflow of £133m in August, following a £122m sell off in July.
This year to date, fixed income funds have shed £628m, primarily from the sovereign bond sector.
Falling prices caused by rising longer-dated yields in the bond market have made the option more tempting, but Glyn warned investors are hesitant and want confidence that yields won’t continue “surging after they’ve bought in”.