Dewi John
August 23, 2022

Everything Flows: Green Equity Funds Go Red for the First Time Since COVID Meltdown

by Dewi John.

Bond ETF sales are a rare venture into the black, as equities see almost £7bn in redemptions.

 

Asset Class View

  • Mutual fund and ETF redemptions excluding money market vehicles ran to £7.9bn over July 2022.
  • Equity funds accounted for £5.8bn of redemptions, while money market vehicles took £2.1bn.

Active v Passive

  • Net passive flows were negative £2bn, in contrast to negative £5.9bn of active money outflows, excluding money market vehicles.
  • The £118m negative flows from passive bonds masks £887m of redemptions from mutual funds, as bond ETFs attracted £769m.

Classifications

  • Money Market GBP was the top selling classification (£2.3bn) following three consecutive months of negative flows.
  • Bond GBP Corporates saw the largest outflows (-£1.7bn), followed by Equity UK
    (-£1bn).

ESG Flows

  • ESG equity funds went into negative territory for the first time since the COVID market meltdown of March 2020, with more than £400m of redemptions.
  • The only positive ESG flows of any significance were the £249m won by bond funds as their conventional peers suffered redemptions of £1.7bn.

Asset Manager View

  • Federated Hermes and Legal & General were the top-selling asset managers, with inflows of £1.76bn and £1.73bn, respectively.

 

Flows by Asset Class

Chart 1: Asset Class Flows, Active and Passive, July 2022 (£bn)

Source: Refinitiv Lipper

 

After a volatile start to July, the FTSE 100 crept up a touch less than 250 points over the month, with other equity markets globally turning upwards in a similar fashion from late June recent lows. At the same time, the yield on the benchmark 10-year gilt were squeezed by about 90 basis points. Fund flows, however, do not reflect this—at least at the most broad-brush asset class level, with redemptions excluding money market vehicles running to £7.9bn.

As was the case in June, equities were the most out of favour, with redemptions of £5.8bn, £3.9bn of which were from actively managed funds.

Bond funds, too, were in the red, to the tune of £1.4bn. All but £118m of this was from active vehicles. There’s a different pattern here to June, when passive inflows were almost exactly matched by active outflows, at roughly £1.4bn apiece. This could indicate that investors reckon inflation has further to run, so there is likely to be more blood-letting in fixed income markets before rates stabilise, offering some degree of security for the asset class. But, as previous months have shown, it’s a febrile market. The only clear trend at the asset class level is that investors continue to cut their equity exposures.

Sterling money market funds were the only sector to see significant inflows, attracting £2.1bn over the month. This follows three months of outflows.

 

Chart 2: Passive Asset Class Flows, Mutual Funds v ETFs, June 2022 (£bn)

Source: Refinitiv Lipper

 

Net passive flows for July were -£2bn, in contrast to -£5.9bn of active money outflows, excluding money market funds. This marks a sight ebbing for active cash and an acceleration for passives, when compared with June (when those figures were -£1.3bn and -£8.1bn, respectively).

All the passive equity cash that was taken from the table this month (-£1.9bn) has been from mutual funds, with a wafer-thin £18m going into their ETF peers. In addition, the £118m negative flows from passive bonds masks £887m of redemptions from mutual funds, with bond ETFs netting £769m. Over £500m went into one US Treasury vehicle, while it was interesting to see £430m of redemptions from one US TIPS ETF—an indication that someone, somewhere, with large pockets thinks US inflation is possibly topping out. As ETFs are more of an institutional instrument, this may indicate that this section of the market is less spooked by the rate environment than their retail peers.

 

Flows by Classification

Chart 3: Largest Positive Flows by Refinitiv Lipper Global Classification, June 2022 (£bn)

Source: Refinitiv Lipper

 

Given the aggregate asset class picture, it’s inevitable that the top-selling classification in July should be Money Market GBP after a quarter of negative flows. There are a number of possible explanations for this turn of fortune. First, while sterling has been in negative territory, USD money market funds ex-UK have been attracting money, and it’s possible that a portion of that has been from UK investors who have been parking their cash there, attracted by the higher yield. The base-rate increase this month could have lured some back. Although they’re still getting hammered by inflation, they’re getting a bit more yield on their cash.

A further factor in money market GBP’s favour may be that in times of high volatility, there’s a tendency for cash to move from such vehicles to government bond funds, which reverses when volatility lowers. As volatility lowers, then cash funds become relatively more attractive.

 

Source: Refinitiv Lipper

 

Bond USD Government was the second-best seller, attracting £869m, with nearly all going into passives. Indeed, one fund dominates the take—the Invesco US Treasury Bond UCITS ETF GBP (£502m). Over July, the yield on US 10-year Treasuries tracked down to about 2.6%, from a peak of about 3.5% in June, while indicating buying activity. The 10-year Gilt showed a similar trend, down to about 1.8% from 2.6%, with Bond GBP Government also taking £229m.

 

Source: Refinitiv Lipper

 

Two absolute return classifications—Bond USD and Other—make an appearance, netting £444m between them. Lastly, given the rampant risk aversion characterising markets, it’s interesting to see Equity China’s appearance in the table, taking £281m, following a strong run for the year to the start of the month, although the MSCI China TR fell by more than 9% over July.

 

Chart 4: Largest Negative Flows by Refinitiv Lipper Global Classification, June 2022 (£bn)

Source: Refinitiv Lipper

 

Bond GBP Corporates took the biggest hit in July, with £1.7bn of redemptions (-£1.2bn passive to £441m active).

This was followed by Equity UK, split more or less 50-50 between active and passive. Three of the 10 sectors with the largest redemptions were bond, and the other seven all equity. Equity sectors are a mixed bag, from higher risk emerging market and Asia-Pacific, alongside the haven market of the US.

Equity UK’s presence is of little surprise, but Equity Global’s presence (-£958m) shows a significant shift in market sentiment when compared with the past few years. Instead, investors are putting their diversified global equity holdings into Global Equity Income vehicles (£212m).

Bond GBP Short Term (-£486m) and Bond USD Inflation Linked (-£447m) both saw significant redemptions. This is significant as it’s the same month that UK inflation topped 10% for the first time in four decades. This suggests that some market participants have placed significant bets on rates having neared their peak.

 

ESG Flows

Chart 5: ESG Asset Class Flows, June 2022 (£bn)

Source: Refinitiv Lipper

 

In June’s report, we noted that, despite fund buyers’ increasing risk aversion, we had yet to see monthly ESG equity fund flows go negative, “although we’re sailing pretty close to the wind”. The indicator has now turned to negative—for the first time since March 2020 during the COVID meltdown, when even gold sold off—with £418m of redemptions. Some £487m was taken out of two share classes, which are both Equity Global. That said, conventional equity funds saw £5.4bn of redemptions.

The only positive flows of any significance were the £249m won by bond ESG, as conventional bond funds suffered redemptions of £1.7bn. Real estate had small positive flows of £16m, with most of this going into one fund targeting climate transition real estate assets.

Outflows from mixed asset ESG are slight (-£8m), especially when compared to the £586m in outflows from conventional mixed-assets funds.

 

Source: Refinitiv Lipper

 

Source: Refinitiv Lipper

 

Flows by Promoter

Chart 6: Largest Positive Flows by Promoter, June 2022 (£bn)

Source: Refinitiv Lipper

 

As major asset classes grapple with redemptions, the 10-top asset gatherers look rather different, as the biggest players face net asset losses. Instead, Federated Hermes and Legal & General come out top, each with more than £1.7bn, with top-selling share classes dominated by money market funds (see tables below).

 

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