January 26, 2023

Everything Flows: Investors Embrace Passive Bonds

by Dewi John.

December stayed in line with the previous month’s rebound, albeit at a more subdued rate.


Asset Class View

  • Investors moved out of cash (-£6.9bn) and into bonds (£2.2bn).
  • Equity flows were almost flat, with a modest £49m inflow.

Active v Passive

  • The rotation from active to passive fixed income vehicles continues, with £2.5bn to -£313m.
  • Across all asset classes, passive mutual funds attracted £2.6bn and ETFs £1.1bn.


  • Equity Global was the most sought-after classification, pulling in £485m passive and £558m active money.
  • Equity UK, UK Income, and Smid all sold off, shedding a collective £2.7bn.

Sustainable Fund Flows

  • Sustainable equity funds saw inflows of £1.4bn, mirroring outflows from their conventional peers.
  • Sustainable asset flows ex-money market funds were £1.7bn for the month, compared to £123m for conventional funds.

Asset Manager View

  • BlackRock attracted most money (£4.1bn), of which almost £1.5bn went into both money market and bond funds, and £1.2bn into equities.


Flows by Asset Class

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

Source: Refinitiv Lipper


In December, the FTSE 100 took a breather, going sideways after rising from its mid-October trough, as 10-year gilts edged upwards. As in November, investors moved out of cash (-£6.9bn in December) and into risk assets (£1.8bn in aggregate) in December. However, we’re still far from reversing the dash to cash seen in October, as investors—predominantly pension funds—stashed an unprecedented £66.6bn in money market funds in response to the late-September mini-budget. The implication, then, is that institutional investors are still sitting on the bulk of this money, waiting for the right moment to feed it back into markets.


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

Source: Refinitiv Lipper


December saw net total flows of -£5.1bn, while ex-money market flows were £1.8bn.

Equity funds posted a modest surplus of £49m, which decomposes to £1.2bn of inflows to passive products and £1.15bn of active outflows. Alternative funds attracted £190m, with £161m of this going to actively managed funds. The big money takers for the month, however, were passive bonds, which netted £2.5bn, while their active peers saw £313m of redemptions. As we’ve noted before, this shift from active to passive in the fixed income space is a well-embedded trend. Given that fixed income yields offering an interesting return for the first time in years and equities will likely struggle in recessionary conditions, the case for bonds could strengthen, along with flows, over the coming months.

On the negative side of the balance sheet, mixed assets and real estate funds suffered redemptions of £404m and £159m, respectively, all actively managed.


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

Source: Refinitiv Lipper


Across all asset classes, passive mutual funds attracted £2.6bn and ETFs £1.1bn. Bond index tracker inflows were split £1.5bn to mutual funds and £948m to ETFs, with the fixed income “great rotation” from active to passive shows no sign of abating. Meanwhile, passive equity funds attracted almost £1.2bn, going £1bn to mutual funds and £196m to their ETF peers.

Further down the scale, passive alternatives took £30m over the month, breaking down to £39m inflows for mutual funds and £9m outflows for ETFs.


Flows by Classification

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

Source: Refinitiv Lipper


There’s more black than we normally see in the chart above, indicating a strong month for passive products in the top-selling classifications. Equity Global takes the number-one spot for the second consecutive month, following a risk-on period where it was shunned. Nevertheless, December flows were muted compared with October, as the classification’s inflows slowed from £3.3bn to a little over £1bn, split £485m passive to £558m active. As you can see from the top sellers in this area, sustainable funds are still very much in focus.


Source: Refinitiv Lipper


Like last month, US equities are in second place (£760m passive to £113m active—a reversal of October’s strong active take), with BlackRock again taking a large part of the pie. Reading the tealeaves of US market prognostications, it seems that markets are betting against further rate rises from the Federal Reserve, and that the troughs of October represent a good entry point.


Source: Refinitiv Lipper


In the last report, we asked what was driving these flows and stated December would be interesting. Well, interesting maybe, in terms of a continuation of the previous month’s trend, but no more revealing. Positive allocations are broadly distributed. And, although bonds are the top money taker in December, there doesn’t seem to be a standout classification that is attracting the money: allocations to bonds—the only asset class seeing significant inflows—seem fairly broadly distributed.


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

Source: Refinitiv Lipper


Money Market GBP saw the largest outflows of any classification, shedding £7.3bn. Given the huge inflows to these funds in October, it’s to be expected that institutional investors’ mattresses are overstuffed with cash, which they’ll be looking to put back to work. But as you can see from the second, fourth, and eighth bars on the chart above, they’re certainly not deploying it to UK equities: large, small, and income classifications saw combined outflows of £2.7bn over the month despite the UK’s good performance relative to other developed market equity markets over the past year.

Interesting, also, to see investors pull back from global high yield. USD and GBP by a combined £589m, with analysts expecting default rates to climb in 2023 for this asset class.



Sustainable Fund Flows

Chart 6: Sustainable Asset Class Flows, December 2022 (£bn)

Source: Refinitiv Lipper


Sustainable assets netted £1.6bn this month, compared to outflows of £6.7bn for their conventional peers. As is so often the case, these numbers are heavily skewed by money market fund flows. If we exclude these, we get £1.7bn versus £123m, respectively. So, a good result for sustainable assets, either way.

As you might expect from a risk on-(ish) month, sustainable equity flows dominate, with these funds taking £1.4bn of flows, as their conventional peers shed a smidgin less (£1.35bn). BlackRock heads the field this month, as can be seen from the table below.


Source: Refinitiv Lipper


Conventional bond flows beat their sustainable equivalents by £1.7bn to £465m. I’ve banged on about this issue at length (for which, sorry—not sorry), but it seems likely that the reason for this is the dearth of sustainable fixed income product out there. As a result, while UK investors have £119.5bn in sustainable equity funds, there’s £27.4bn in bonds, and just £7.5bn of this in passive products. That investors feel they know and understand sustainable equity but are less sure about how sustainability strategies are implemented in other asset classes will also surely act as a drag on the latter.


Source: Refinitiv Lipper


Lastly on this section, this part of the report is narrowing its focus from broad ESG funds—those which indicate some form of ESG strategy in their fund documentation—to a smaller focus of sustainable funds, defined as all SFDR Article 9 funds plus all Lipper Responsible Investment Attribute funds reduced to those containing indicative sustainable keywords in the fund name.


Flows by Promoter

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

Source: Refinitiv Lipper


BlackRock led the pack at year end, attracting £4.1bn, of which almost £1.5bn went into both money market and bond funds, and £1.2bn into equities.


Source: Refinitiv Lipper


DWS’ biggest money taker, dominating its flows for the month, was the Deutsche Managed Sterling Advisory money market fund, netting £2bn.

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