UK investors turn to bonds as equities valuations continue to stretch
UK investors piled into bonds in June, as soaring valuations in equity markets has left many investors looking to avoid heightened risk and stretched value.
Bond funds attracted over £1bn of net inflows last month, making it third-strongest on record for fixed income funds, according to the latest data from Calastone.
The streak came as investors continue to rebalance portfolios towards assets offering income as well as diversify away from equity markets amid heightened valuations.
Bonds also attracted £2.2bn of new inflows in the first six months of the year.
In response, equity funds suffered net outflows of £437m, with the asset class suffering £2.6bn outflows in the first half of the year.
The Asia-Pacific region suffered the largest equity outflows in June, with investors selling £312m of their holdings, marking the 38th consecutive month of outflows.
UK-focused funds lost £260m, reversing May’s slight inflows, while both global and North American funds dodged losses.
Edward Glyn, head of global markets at Calastone, said: “Bond funds are benefiting from an unusually attractive combination of high income and the prospect of capital gains if interest rates begin to fall.
“At the same time, geopolitical tensions, an uncertain economic outlook and elevated equity valuations are encouraging investors to rebuild the defensive side of their portfolios.”
Concentration trap
Asset managers are increasingly sounding the alarm over valuations as markets experience continued highly concentrated gains off the back of the AI boom.
AI and tech companies are dominating market value, with indexes including the S&P 500 becoming increasingly concentrated.
This means the vast majority of index capital flows into a few mega-cap stocks, leaving passive investors exposed to a potential crash, as the funds hold weight based on market capitalisation, which causes more capital to be fed to large companies.
This has left industry figures urging investors to be aware of the anticipated stock market debut of Open AI and Anthropic, following Space X’s listing earlier this year, in particular for those who take a passive approach, as they were already affected by the tech sell-offs last month.
Passive investing is a long-term strategy aimed at gradually building wealth, but instead of picking individual stocks, investors buy and hold broad, low-cost index funds that typically track a market benchmark.
In contrast, active investing allows both investors and fund managers to track stock performance in an attempt to outperform the broader market and avoid the concentration trap.
Investors make decisions based on market trends, economic shifts and companies’ financial and corporate performance.
Property fund outflows ease
Elsewhere, property funds outflows fells to £6.1m, as investors anticipate incoming lower interest rates will bring buyers back to the market.
Outflows dropped from £14.8m in May, continuing the broader trend of dwindling outflows which began in October 2025.
But despite the fall, and June marking the smallest month of outflows since May 2024, it was the 25th consecutive month of losses, reflecting ongoing struggles in the housing market, with Glyn noting the market is not yet at a “decisive turning point”.
Glyn said: “Property funds have been under pressure since higher interest rates reduced the relative appeal of commercial real estate and increased financing costs across the sector.
However, expectations that interest rates are moving lower, together with attractive property yields and signs of
stabilisation in commercial real estate valuations, appear to be encouraging buyers back into the market.
“We’re not yet seeing a decisive turning point, but the trend over recent months points to
a gradual rebuilding of confidence.”