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February 22, 2023

Everything Flows: Passive Bonds Continue to Dominate Flows in January

by Dewi John.

Fixed income overall nets more than £8bn over three months, with index-tracking funds taking the lion’s share.

 

Asset Class View

  • January saw the largest outflows from money market funds over the past three years (£15bn).
  • Bonds were the best-selling asset class, seeing inflows of £3.5bn.

Active v Passive

  • Passive bond funds took £2.1bn of the £3.5bn inflows.
  • The £244m of passive equity inflows were split £92m to £152m between mutual funds and ETFs.

Classifications

  • Bond GBP Corporates was the top money-taker, netting £1.2bn.
  • While Bond GBP Short Term attracted £536m over the month, it has suffered £3.9bn of outflows over the year to January.

Sustainable Fund Flows

  • Sustainable excluding money market funds and their conventional peers both netted about £1.3bn.
  • Equity funds took the largest part of sustainable flows (£748m), with the bulk of this going to global funds.

Asset Manager View

  • Despite the heavy outflows from money market funds, the month’s four largest money takers all saw their flows dominated by cash funds.

 

Flows by Asset Class

Chart 1: Asset Class Flows, 36 Months, to January 2023 (£bn)

Source: Refinitiv Lipper

 

The trials and tribulations of the UK economy don’t seem to have dented the optimism of investors in UK equities over January, as the FTSE 100 trended upwards on the way to its February 8,000-plus high, as the yield on the
10-year gilt trended lower, albeit still significantly higher than last September. Market commentary, indeed, took an optimistic turn, with many daring to hope that the much of the world would dodge recession in 2023 by the skin of its teeth.

Alongside this, we see the largest outflows from money market funds over the past 36 months covered by chart 1, to the tune of £15.1bn, the nearest being February 2021, at £13bn. That’s £28.3bn redeemed from money market funds since November—though less than half of the £66bn that was ploughed into them in October.

 

Chart 2: Asset Class Flows, Active and Passive, January 2023 (£bn)

Source: Refinitiv Lipper

 

The biggest move over January was, of course, the exit from money market funds: £15.1bn, about double that seen in December.

Bonds were the best-selling asset class in January, seeing inflows of £3.5bn. It’s a difficult market to call, given that rising rates will likely leave fixed income investors nursing losses, but there certainly seems to be a sense that bonds have become a more attractive asset class over the past year—although fixed income has quite a hole to dig itself out of over the period.

Despite climbing equity markets, UK investors sold off the asset class to the tune of £1.2bn, although passive equity funds attracted £244m. Mixed assets took £613m and alternatives saw outflows of £192m.

 

Chart 3: Passive Asset Class Flows, Mutual Funds v ETFs, January 2023 (£bn)

Source: Refinitiv Lipper

 

Passive bond funds took £2.1bn of the £3.5bn inflows over the month, as the trend for passive over active in fixed income continues. This in turn was divided £1.6bn to £530m between passive mutual funds and ETFs, respectively. Meanwhile, the £244m of passive equity inflows were split £92m to £152m between mutual funds and ETFs. Elsewhere, as is the norm, there’s little activity on the passive front, with other asset classes being active-dominated.

 

Flows by Classification

Chart 4: Largest Positive Flows by Refinitiv Lipper Global Classification, January 2023 (£bn)

Source: Refinitiv Lipper

 

Bond GBP Corporates was the top money-taker for January, pulling in £1.2bn (£1bn passive/£170m active). Bond GBP Government also netted £593m and Bond GBP Short Term £536m over the month. While you might expect short-dated bonds to have been popular over the past year of rising rates, that’s not really been the case, with the classification having suffered £3.9bn of outflows over the year to January. And, while bonds are back, baby, it’s a tad surprising to see Bond Global High Yield GBP (£308m) appear in the top 10, with investors generally keeping HY at arm’s length, with the default rate expected to rise.

 

Source: Refinitiv Lipper

 

As with November and December, US equity funds come second-placed, netting £931m, with £722m of this going to passive funds, with this bias indicated in the constituents of the top-five money-takers below. It’s definitely not a month for equities, with the next classification in the asset class not appearing until Equity Global ex UK, fourteenth-placed, taking £186m, then Equity Global at £183m.

 

Source: Refinitiv Lipper

 

Mixed Asset GBP Aggressive attracted £350m over the month, continuing its run as the most popular mixed asset classification, after a year that’s seen lower-risk multi-asset funds struggle because of their bond exposure.

 

Chart 5: Largest Negative Flows by Refinitiv Lipper Global Classification, January 2023 (£bn)

Source: Refinitiv Lipper

 

As has been the case since November, Money Market GBP saw the largest outflows in January, at negative £15.6bn. This pretty much dwarves the other negative flows.

That said, again, UK equities continue their negative run: Equity UK (-£1.9bn); Equity UK Income (-£334m); and Equity UK Small & Mid Cap (-£246m), which taken together represent the only redemptions that are significant relative to Money Market GBP.

 

 

Sustainable Fund Flows

Chart 6: Sustainable Asset Class Flows, January 2023 (£bn)

Source: Refinitiv Lipper

 

Sustainable excluding money market funds and their conventional peers both netted about £1.3bn in January. All sustainable asset class flows were in the black, albeit some barely (alternatives: £2.7m). Equity funds took the largest part of ESG flows, at £748m, with the bulk of this in turn going to global funds, as is indicated from the table below and, indeed, as is generally the case.

 

Source: Refinitiv Lipper

 

Sustainable bonds took just £442m of the £3.5bn that the asset class overall attracted during the month, with global bond funds again seeing much of the action. To wearily beat out a now familiar tune on the drum, this is probably best explained by the fact that there’s relatively little passive sustainable fixed income available on the shelf, and passive fixed income is what’s selling (see chart 2).

 

Source: Refinitiv Lipper

 

Perhaps surprisingly, as there are some large well-known providers in the sustainable mixed asset space, conventional funds dominated the flows this month, at £559m to £54m.

 

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, January 2023 (£bn)

Source: Refinitiv Lipper

 

Morgan Stanley led January’s market, with inflows of £2.2bn—£2.1bn of this into one money market fund (see table below).

 

Source: Refinitiv Lipper

 

Federated Hermes, HSBC, and Royal London were all within touching distance of one another for the month, attracting £1.3bn, £1.2bn and £1.2bn, respectively. Despite the heavy negative flows, Federated Hermes take, like Morgan Stanley, was dominated by money market flows. Indeed, paradoxically, money market funds—in a month of large-scale money market outflows—saw the largest flows for all four of the top money-takers.

Source: Refinitiv Lipper

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