Dewi John
September 20, 2022

Everything Flows: Bonds Firmly in the Black Despite Gilt Selloff

by Dewi John.

While 10-year gilt saw greatest increase in almost 30 years as inflationary concerns gain increasing traction, investors nevertheless rotated from equity to bond funds in August.

 

Asset Class View

  • Money market and equity funds saw the largest outflows, at £7.5nb and £5.6bn, respectively.
  • Meanwhile, despite the large selloff in UK government bonds, bond funds enjoyed the largest positive flows, at £2.3bn.

Active v Passive

  • Total redemptions for the month were £10.5bn, with all but £304m of this being from actively managed funds.
  • ETFs dominated passive bond sales, taking £812m as opposed to £384m for
    mutual funds.

Classifications

  • Only one of the top 10-selling classifications was equity (global income), with Bond Global GBP and USD taking the top two slots.
  • Equity Global, on the other hand, has lost its favoured status, with £872m of outflows, with Europe, Asia, UK (especially Smid), and US also selling off.

ESG Flows

  • ESG equity funds had their second consecutive negative month, shedding £863m.
  • Mixed asset and bond ESG funds saw inflows of £188m and £180m, respectively.

Asset Manager View

  • True Potential was the top-selling promoter, with net sales of £432m, £411m of which was accounted for by mixed-assets funds.

 

Flows by Asset Class

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

Source: Refinitiv Lipper

 

Total redemptions from UK mutual funds and ETFs stood at £10.5bn over August, or £3bn excluding money market vehicles. All but £304m of this was from actively managed funds. Money market funds continued their negative trend (-£7.5bn), following the positive July blip of £2.1bn, and have seen redemptions of £26.1bn over 12 months.

Main equity indices were down over the month, with the FTSE 100 going from 7,423 to 7,284—creeping up to a peak of 7,550 on 19 August and falling steeply thereafter. The relative outperformance of the UK seems to have run out of steam despite a value bias that should be beneficial to the market. It’s lagged the US, and the FTSE 100 has run broadly in line with the EURO STOXX 50, with both outpacing the FTSE 250.

In such an environment, it’s not surprising that we’re seeing outflows from equity funds. Redemptions for the asset class stood at £5.6bn over the month, with £4.6bn of that being from actively managed vehicles.

Given the risk-on nature of the month, it’s a tad counterintuitive to see the 10-year gilt yield increase by the greatest amount for almost 30 years, with the selloff almost certainly spurred by inflationary fears. That said, bonds have been in positive flow territory for the month, whether active (£1.1bn) or passive (£1.2bn).

Alternatives attracted £224m, with almost £300m going to two funds—one alternative multi-strategies and another absolute return. If markets continue to struggle, it will be interesting to see if more investors seek out strategies stressing loss limitation.

 

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

Source: Refinitiv Lipper

 

Overall, passive funds have done well over the months, with active funds ex-money market shedding £3.3bn, while their passive peers gained £305m.

While both passive and active bonds were in the black, and fixed income passive mutual funds and ETFs as a result, ETFs took a greater share of the passive pie (£812m versus £384m), with flows to bond ETFs being pretty stable since their last negative month in March 2022.

All of the net passive equity money coming off the table in August was from mutual funds (£1bn), with ETFs scraping up £24m over the period—broadly similar to the pattern the previous month.

 

Flows by Classification

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

Source: Refinitiv Lipper

 

It’s testimony to the risk-on nature of the month that there is only one equity classification in the top-10 sellers—and that barely squeezing in at number 10.

Global bonds, GBP and USD, have together taken £1.2bn, although there’s a markedly different way that these have been invested: Bond Global GBP has been mainly active (£691m versus £124m passive), while all but £4m of its greenback peer has gone passive.

Source: Refinitiv Lipper

 

Source: Refinitiv Lipper

 

And, while no-one wanted UK govvies in August, Bond USD Government sucked in £513m.

Given volatile markets, it’s understandable that many investors will be attracted by the promise of absolute return, and GBP and USD funds in this class together attracted just shy of £600m, all actively invested.

What’s also interesting is the continuing attraction of Mixed Asset GBP Flexible and Aggressive funds. Cautious funds have been in the doldrums for some time, and now Balanced have fallen down the table (though perhaps only temporarily), with investors possibly mindful of the damage that rising rates could do to the fixed income portion of their portfolios. That said, the top selling funds in Flexible are a mixed bag, with a wide variety of FI allocations, so there’s more going on than a general shift to equity here.

Lastly, on that equity outlier on the table, with £147m going to Equity Global Income funds. As you can see from the table below, Equity Global has reversed its years-long positive trend, with investors increasingly looking to get their global exposure not with the growthy tech companies that had served them so well for most of this century, but instead with dividend payers, more robust in an inflationary environment.

 

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

Source: Refinitiv Lipper

 

The largest outflows are something of an inversion of inflows. Of course, Money Market GBP heads the table, with £7.5bn of redemptions, but all bar one of the rest (Alternative Credit Focus, at -£263m) are equity classifications, with Equity Europe ex UK the least favoured of this cohort (-£1bn). As noted above, Equity Global has seen its fortunes reverse—previously having seldom not been a top seller—with £872m of outflows, followed by UK small and mid caps shedding £639m. That’s no surprise, as these funds have underperformed their UK blue-chip larger siblings and are likely to continue to do so until the economy turns a corner—preferably one that doesn’t have an angry bear hiding round it.

In general, as you can see from the table, whether its domestic, US, European, Asian, or global, if it’s an equity, investors aren’t interested. Even the recent affection for global income funds doesn’t stretch as far as their UK equivalents, with Equity UK Income seeing outflows of £97m.

Interestingly, while UK gilts suffered a broad-based sell-off, Bond GBP Government funds only saw outflows of £3m, begging the question of who has been doing all the selling.

 

ESG Flows

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

Source: Refinitiv Lipper

 

ESG equity funds are in their second negative month, more than doubling July’s outflows, with August (-£863m). There’s been much speculation recently that this signifies the bursting of the ESG bubble. The figures don’t back this up—at least yet. There have been £4.8bn of redemptions from conventional equity funds, so the most likely explanation is that ESG equity is a casualty of the broader negative equity story, rather than a narrative turned sour in its own right. If, however, they underperform longer term, then in the light of UK regulations around fiduciary duty, this may change. But we are not there yet.

The top-selling ESG asset class this month is mixed assets, albeit with a relatively modest net flow of £188m and, as you can see from the table below, no single funds dominating the take (as we so often see in the equity space, for example).

 

Source: Refinitiv Lipper

 

Next placed comes bonds, with £180m. Flows with this asset class are overshadowed by their conventional peers, which have attracted £2.1bn over the month. There’s still a scepticism over fixed-income ESG, not least around limited opportunities for engagement, and potentially a lack of product when compared to the more amply provided equity space.

 

Source: Refinitiv Lipper

 

Flows by Promoter

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

Source: Refinitiv Lipper

 

It’s indicative of the negative flows characterising the month that the top-selling promoter has taken £432m. Normally, that would be mid-table, above. True Potential’s lead was almost entirely driven by mixed-assets funds, which accounted for £411m of its net flows.

 

Source: Refinitiv Lipper

 

Second-placed HSBC netted £407m, with £340m of that going to money market vehicles, and a further £119m to mixed assets.

 

Source: Refinitiv Lipper

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