Calastone: Investors shun record-high stock markets as £1.3bn flows out of equity funds in August

Equity funds saw £1.31bn of outflows in August, the worst since 2022, Calastone data shows, as investors pulled back from global and UK stocks and shifted into safe-haven money market funds amid correction fears.

Equity outflows deepen despite record stock prices

Record stock prices failed to inspire confidence in August as investors accelerated their flight from equities, according to the latest Fund Flow Index from Calastone, the largest global funds network. Investors withdrew £1.31bn from equity funds, up from net selling of £1.13bn in July, marking the worst bout of outflows since the summer of 2022. Meanwhile, safe-haven money market funds enjoyed their best month in two years. Investors added a net £633m to their holdings.

Edward Glyn, head of global markets at Calastone said:

“Outflows in the summer of 2022 reflected a sharp market sell-off driven by central banks raising rates to squeeze inflation, the oil shock from Russia’s Ukraine invasion, and fears of recession (which didn’t materialise). By contrast, this summer, stock markets are ignoring a wide range of negative signals and have continued to reach new highs. But fund investors are wary, clearly fearing a correction is round the corner. August was the third consecutive month of outflows, an unusually long stretch, as investors top-slice holdings to hang on to strong capital gains this year and park the proceeds in the money markets to wait out the storm they fear. Whether their caution is justified remains to be seen.”

Global funds face unprecedented retreat

Global equity funds were particularly hard hit. Investors withdrew £658m in an unprecedented third consecutive month of outflows from a sector that had only ever seen three individual months of net selling before June this year. Outflows from global funds even exceeded outflows from UK-focused funds, which have been the least favoured equity sector in all but two of the last 51 months; UK-focused funds saw outflows of £657m in August, only the second time since April 2017 they have beaten global funds. European funds continued to enjoy inflows, while Asia-Pacific funds saw their 28^th consecutive month of net selling, despite their strong performance this year.

Fixed income funds tread water

Fixed income funds remain on the sidelines. After £122m of outflows in July, investors added £133m of new cash in August. Year-to-date fixed income funds have shed £628m, primarily from the sovereign-bond sector.

Edward Glyn added:

“Global equity funds have been the go-to strategy for investors for a decade, almost never seeing outflows, even as capital in other sectors has ebbed and flowed. This has changed markedly in the last three months. This is likely to be a temporary phenomenon, and doubtless reflects scepticism around the sky-high valuations of global mega-cap stocks, especially US tech. Highly-priced US equities enjoy a disproportionately large weighting in global funds compared to profits or GDP, so they don’t offer the diversification benefits they have in the past, but global funds nevertheless save investors from having to pick regional winners and that will doubtless prove attractive again before long.”

“Concerns over equity prices are driving flows into the safest fund category – money markets – especially as longer-dated yields in the bond markets continue to rise, meaning falling prices. High yields are tempting, and if you can lock in at the peak would provide attractive long-term returns, but investors want confidence they won’t keep surging after they have bought in.”