October 25, 2022

Everything Flows: Nowhere to Run to; Nowhere to Hide

by Dewi John.

September saw the largest fund redemptions on record. Everything from equities to cash sold off in the month that 11 Downing Street played Dr Frankenstein with the UK economy.

 

Asset Class View

  • September saw the largest UK net fund redemptions on record (£27.9bn) as the largest (£13.6bn) was pulled from equity funds.
  • All asset classes were in negative territory, with the largest after equity being from alternatives (£5.1bn) and bonds (£4.7bn).

Active v Passive

  • Active redemptions were almost 10 times that of passives (-£25.2bn to -£2.6bn, respectively).
  • A comparatively good month for passive bond funds, with positive flows divided between £1.6bn to £475m for mutual funds and ETFs, respectively.

Classifications

  • Despite the selloff by institutions of UK government bonds following the 23 Sept mini-budget, Bond GBP Government was the best-selling classification (£834m).
  • On the other side of the equation, Alternative Credit Focus shed £4.7bn, with much of the bloodletting being from funds invested in ABS.

ESG Flows

  • Equity ESG funds saw £3bn of redemptions, compared to more than £10bn from their “conventional” equivalents.
  • ESG negative flows were almost £9bn, compared to nearly £19bn for their conventional peers.

Asset Manager View

  • Morgan Stanley and HSBC were the two largest-selling promoters, with the flows of both being dominated by money market funds.

 

 

Flows by Asset Class

Chart 1: Asset Class Flows, 36 Months, September 2022 (£bn)

Source: Refinitiv Lipper

 

I’d normally start with a run through the pertinent economic data of the month, in case you need a reminder. But I rather suspect that September’s events are fresh in your memory, unless by some freak accident you’ve been locked in a floatation tank for the past few weeks. Suffice it to say that the 10-year gilt yield went from 2.8% to 4.1%, peaking at 4.5% on 27 September.

This all had a dramatic effect on the fund world. September 2022 saw the largest UK net redemptions on record—£27.9bn. Surprisingly, no single month during the global financial crisis comes close, and even the COVID meltdown saw investors take just £7.7bn off the table in March 2020. If we discount the £12bn positive flows into money market vehicles, outflows for that month were £19.7bn, so last month still breaks all records.

This time, there’s been no rush for cover in money market funds, given the increasingly corrosive effect of inflation on cash. While it’s not possible to tell where capital is being deployed from these figures, paying off mortgages would seem a reasonable guess. Or stockpiling tinned food.

 

 

Chart 2: Asset Class Flows, Active and Passive, September 2022 (£bn)

Source: Refinitiv Lipper

 

A record £13.6bn was redeemed from equity funds in September, split between £8.2bn from active funds and £5.3bn from passive.

Things looks a little different with both alternatives and bonds—not in terms of the overall rush for the door, but how it has played out between active and passive funds, as passives are in positive territory for both.

What’s perhaps unusual is why this should be so bad right now, especially when compared with the global financial crisis’ depths of 2008 or the meltdown during the nadir of COVID (March 2020), when even gold sold off. While institutions sold off heavily in the latter two examples, fund investors didn’t react as dramatically as they did this September. What’s different this time is the rapid ratcheting of rates in a high-inflation environment. It’s possible that, in the retail world at least, investors are cashing in to reduce their liabilities—not least mortgages—as debt service charges spiral, along with day-to-day costs. Unfortunately, fund share classes are mute on this issue, though things will likely become more transparent over coming months.

 

Chart 3: Passive Asset Class Flows, Mutual Funds v ETFs, August 2022 (£bn)

Source: Refinitiv Lipper

 

Looking at passive funds alone, it looks like a normal, if rather bloody, risk-on month, with bonds up and equities (considerably) down, whether in their mutual fund or ETF incarnation. With both, mutual funds saw most of the action, as bond passive mutual funds netted £1.6bn and ETFs £475m, while equity passives saw outflows of £4.9bn and £475m, respectively. Almost all of the positive flows to alternatives were to a synthetic gilt fund.

 

Flows by Classification

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

Source: Refinitiv Lipper

 

Given the month we’ve had, there’s no denying that chart 4 looks a little weird. Why, oh why, are UK govvies the best-selling fund sector (£834)? Indeed, the only negative week for the classification that month (-£180m) was the one beginning Sept. 22, coinciding with mini-budget of then-chancellor Kwasi Kwarteng (remember him?). Remarkably, the positive flows for the following week were double that.

My best guess for why this is happening is that, while pension funds liquidated their UK government bonds to meet margin calls, other investors have been rebalancing.

 

Source: Refinitiv Lipper

 

Despite the abysmal performance of UK linkers—hamstrung by their longer duration than their US TIPs equivalents (22-plus years, versus about eight), and thinner markets—Bond GBP Inflation Linked took more than £509m. Alternative Other too is a linker play, with the entire positive flow going to a synthetic replication of a linker index. Again, it’s a little hard to descry what’s happening here: given the market is factoring in more rate rises, it’s almost certain not a calling of the rate peak, so there’s likely more pain on the way for those holding these assets.

There’s only one game in town with second-placed Bond JPY, as Coutts Japan Enhanced Index Govt Bond Fund took in £561m.

 

Chart 5: Largest Negative Flows by Refinitiv Lipper Global Classification, September 2022 (£bn)

Source: Refinitiv Lipper

 

More than £3bn alone was withdrawn from two ABS-based funds in the Alternative Credit Focus classification this month, with investors running scared of this instrument not for the first time this year. Alternative Credit Focus as a whole shed £4.7bn this month, followed by £3.3bn from Equity Global, split £1.1bn to £2.2bn, passive to active. One constant, irrespective of market direction, is that no-one seems to want Equity UK, with the asset class seeing redemptions of £2.4bn.

It’s interesting to note that, despite the punishing effect of rate rises on longer-term bonds, there were £1.4bn of withdrawals from Bond GBP Short Term funds, with their modest yields being overwhelmed by inflation.

 

 

ESG Flows

Chart 6: ESG Asset Class Flows, September 2022 (£bn)

Source: Refinitiv Lipper

 

With the exception of the merest sliver (£8m) into real estate, all sustainable asset classes were in negative territory this month—though this is likely less a function of investors’ sentiment towards the strategy than an expression of the general selloff.

As ever, however, there are some winners even in the bleakest of times: as you can see from the table below, a range of sustainable bond funds, from global through to high-yield, managed to attract £100m-plus of assets over the month.

 

Source: Refinitiv Lipper

 

As tends to be the case, positive flows in the equity space were rather more focused on the global front (see table below).

 

Source: Refinitiv Lipper

 

Flows by Promoter

Chart 7: Largest Positive Flows by Promoter, September 2022 (£bn)

Source: Refinitiv Lipper

 

Positive promoter flows were understandably subdued in September, with top money-taker Morgan Stanley seeing money market flows into two share classes account for almost all of this (see below).

 

Source: Refinitiv Lipper

 

Likewise, while second-placed HSBC’s flows were more diversified by vehicle, they mainly went to the same asset class.

 

Source: Refinitiv Lipper

 

Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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