November 22, 2022

Everything Flows: Cash is King, Queen and the House of Lords

by Dewi John.

Money Market GBP inflows were the largest on record, as pension funds ran for cover, as September’s mini-budget inflicted maximum damage

 

Asset Class View

  • October saw the largest UK fund inflows on record of £41.1bn. However, this was due to £66.6bn inflows to money market funds, with all other asset classes in redemption mode.
  • Alternative, bond, equity and mixed asset funds all suffered redemptions in excess of £5bn, with bonds seeing the largest outflows of £7.9bn.

Active v Passive

  • Excluding money market funds, active funds saw total outflows of £19.5bn, while passives lost £6bn.
  • Despite huge redemptions for the asset class overall, bond ETFs attracted more than £1bn for the month.

Classifications

  • Unsurprisingly, Money Market GBP was the classification with the greatest positive flows: £76.9bn. Equity US followed with £1.6bn
  • Alternative Credit Focus funds lost £4.3bn, as investors continue to exit ABS-based funds, shunning their heavy exposure to consumer debt.

ESG Flows

  • ESG equity funds attracted £2.5bn, their first positive month since June.
  • Meanwhile, ESG bond funds were hit with £2.4bn of redemptions, though this is likely due to their domination by active strategies in a passive-driven market.

Asset Manager View

  • Big money market fund providers such as Legal & General, Insight and BlackRock took the lion’s share of cash.

 

Flows by Asset Class

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

Source: Refinitiv Lipper

 

You wait ages for an unprecedented market movement, then two come along within a month of one another.

As reported in our previous report, September saw record outflows of £27.9bn, most of which came out of equity funds. October has responded with its own ‘hold my beer’ moment, and seen inflows of £41.1bn—another record. All of this and more—£66.6bn—has been to money market funds, so outflows from risk assets almost equal the negative flows for September, at £25.4bn.

What’s going on—why are investors putting money into cash, something they’ve been reluctant to do as double-digit inflation continues to take large chunks out of it in real terms? As my colleague Detlef Glow points out here, it seems to have been a reaction by pension funds to the ‘mini-budget’ of 23 September, as liability-driven investment (LDI) schemes were forced to build up extra collateral for their LDI hedges as their funding ratios increased along with yields.

The corollary of this is that schemes now find themselves in better funding positions, and therefore with the luxury of taking some risk off the table. So the logic is that much—though perhaps not all—of this cash will be redeployed in the coming months, with a shift to lower-risk alternatives and bonds. We will keep a weather eye on flows to see if this expectation pans out.

 

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

Source: Refinitiv Lipper

 

Over the month, the FTSE 100 went from 6909 to 7208 as Armageddon receded in the rear-view mirror. Likewise, the 10-year gilt yield peaked at more than 4.4% on 10 October, thereafter easing down to less than 3.6% by month end.

Despite this, for risk assets (other than a £40.7m inflow for commodity funds, too small to be visible on chart 2), it’s been negative flows all the way.

A record £13.6bn was redeemed from equity funds in September, split between £8.2bn from active funds and £5.3bn from passive, and was likely the initial reaction to post-budget market turmoil in the final days of the month. Redemptions in October were not quite so brutal, at about half that level: £6.8bn. Much of this is a result of pension funds moving into cash, as they sold off liquid assets in order to fund increasing their liability hedges. Most came out of indexed funds (£5.2bn was from passives in October) and bonds.

Mixed asset and alternative funds also took a considerable hit, with redemptions of £5.8bn and £5bn respectively.

 

 

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

Source: Refinitiv Lipper

 

As indicated above, passive equity funds (followed by active bond) have borne the brunt of the selloff. What’s interesting is that all but £3.8m of the £5.2bn of passive equity outflows has come from mutual funds. As I understand it, UK pension funds are under-exposed to ETFs, so this behaviour tallies with that. Nevertheless, the distinction is stark.

That said, the pattern of positive flows for fixed income ETFs, even when the asset class is in heavy redemption mode—as is the case in October—continues, with the former taking £1bn as their passive mutual fund equivalents shed £1.9bn.

 

Flows by Classification

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

Source: Refinitiv Lipper

 

First of all, I’ve removed the largest money-taker—Money Market GBP, at £76.9bn—from the graph, because everything else in the top 10 is barely legible. So what’s depicted above are the top two-to-11 inflows by Lipper Global Classification.

 

Source: Refinitiv Lipper

 

While October saw large equity redemptions—especially from mutual fund trackers—not all equity classifications had reason to be down in their cups. Indeed, Equity US saw £1.6bn of inflows—reason for cheer even in the most bullish of months, let alone one such as this. As can be seen from the table below, all of this and more (£1.9bn) was claimed by a newly launched, actively managed BlackRock ESG fund. Equity US Income also enjoyed £133m of inflows.

 

Source: Refinitiv Lipper

 

And, while UK gilt funds suffered more than £1bn of redemptions this month, Bond USD Government took in £731m.

 

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

Source: Refinitiv Lipper

 

Alternative Credit Focus took a significant hit in October, and if one takes a closer look as to which funds this is affecting, it’s not difficult to see why. Investors pulled almost £3.3bn from four asset-backed security funds in October. More than £3bn alone was withdrawn from two ABS-based funds in September. ABS are heavily exposed to the consumer through mortgages and credit cards, and the consumer looks vulnerable in this environment. Investors will also no doubt remember how these instruments performed during the global financial crisis, and are clearly deciding to give them a wide berth in case the same thing happens again.

It’s unusual to see much action in the global ex-UK part of the market—it’s generally dwarfed by its inc-UK sibling, whichever way flows are going. However, this month saw £2.9bn exit the classification. Some £3.3bn of assets have come from one tracker fund share class, so the most likely explanation is that this is a result of pension funds scrambling for liquidity, rather than a view being exercised on a particular asset class.

 

ESG Flows

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

Source: Refinitiv Lipper

 

Here’s a turnup for the books: amidst a combination of a huge equity sell-off, and evidence of investors love affair with ESG funds souring, equity ESG funds are in the black for the first time since June—when net flows were a paltry £38m. However, in October, ESG equity has taken £25.3bn, as their conventional equivalents shed £9.1bn. So this is a lot more than a dip back into the black.

There’s a good spread of regions in the top-money takers: the usual contenders in Equity Global, plus US, UK and emerging market funds—even £207m for an Equity Japan fund.

Ethical money market funds took a significant slice of cash inflows, with £17.1bn of the £66.6bn total for the month.

The situation is not so rosy for ESG bonds, which have suffered £2.4bn of redemptions, as compared to £5,5bn of outflows for conventional bond funds. In Lipper’s Q3 review of the UK ESG fund market, I speculated the asset classes woes may be because fixed ESG indices tend to be longer duration than their conventional equivalents, and therefore more vulnerable to losses in a rising rate environment. While that’s true, funds aren’t indices, and the ESG bond fund market has a broadly similar—in in key classifications lower—duration than their conventional peers. Instead, what seems to be happening is that ESG bond funds have been collateral damage in the rotation from active to passive exposure, as the ESG bond fund market is undersupplied to a considerable degree. I’ll be looking at this in greater depth in a forthcoming piece, so if you’re interested (and why wouldn’t you be?), please keep an eye on Lipper Alpha Insight over the next week or two.

 

Source: Refinitiv Lipper

 

Flows into asset classes other than equity have been relatively modest, but despite the heavy overall outflows, there have been some significant winners in ESG bond:

 

Source: Refinitiv Lipper

 

Flows by Promoter

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

Source: Refinitiv Lipper

 

Given the month, it’s no great shock that those firms that have dominated sales are those that dominate money market funds, with LGIM taking £21.3bn, Insight £17.7bn and BlackRock £14.2bn.

 

Source: Refinitiv Lipper

Source: Refinitiv Lipper

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