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March 20, 2023

Everything Flows, Feb 2023: Cashing Out

by Dewi John.

Money market fund redemptions were the largest quanta by asset class for the fourth consecutive month, with net inflows into long-term assets.

 

Asset Class View

  • Bond funds saw the greatest inflows (£4.4bn), followed by mixed assets (£1.4bn).
  • Equity funds saw outflows of £380m, although alternative strategies saw a reversal of last year’s fortunes, where they suffered £12.9bn of outflows, attracting £325m.

Active v Passive

  • Net flows to long-term assets split £3.1bn active to £2.6bn passive strategies.
  • Passive bond mutual funds attracted £1.6bn and their ETF kin attracted £955m.

Classifications

  • Equity Global and Equity Global Income attracting £935m and £495m, respectively, as their UK equivalents continued to shed money.
  • Almost £1bn flowing into fixed income assets generally seen as hedges against rising inflation or rates.

Sustainable Fund Flows

  • Sustainable equity inflows stood at £1.2bn for February, as their conventional peers suffered outflows of £1.6bn.
  • Sustainable bond funds took about one-tenth of the assets of conventional funds (£409m to £3.9bn, respectively).

Asset Manager View

  • M&G Investment saw inflows of £2.4bn, with equity products attracting £1.7bn and bond £674m.

 

Flows by Asset Class

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

Source: Refinitiv Lipper

 

Both the FTSE 100 and 10-year gilt yields crept up steadily over February. Meanwhile, money market funds saw their fourth consecutive month of outflows, following October’s not so much dash as stampede for cash. Risk assets in aggregate saw their fourth month of inflows—which is, of course, just the flip side of the coin of the former.

Some £41.2bn of the £66bn that was shovelled into money market funds in October has since been withdrawn, as pension funds have not seen the sky fall on their heads and have instead looked to redeploy that cash. Bond funds have been the largest recipients (£12.1bn), followed by mixed-assets (£5.8bn), then equity (£4.5bn).

 

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

Source: Refinitiv Lipper

 

Net flows for February were -£7.2bn, though excluding money market funds this turns positive to the tune of £5.7bn. That latter figure splits £3.1bn active to £2.6bn passive strategies. Echoing the four-month trend (chart 1), bond funds saw the greatest inflows (£4.4bn, split £1.8bn active to £2.5bn passive), followed by mixed-assets (£1.4bn, all to active vehicles).

It’s a risk-on month for equities, which suffered redemptions of £380m, although passive funds netted £74m. Alternative strategies saw a reversal of fortune last year, where they suffered £12.9bn of outflows, attracting £325m.

 

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

Source: Refinitiv Lipper

 

Within passives, there are really only two games in town: equity and bond. As you’d expect from the aggregate view, above, passive bond funds dominate this month, as fixed income passive mutual funds attracted £1.6bn and their ETF kin £955m, proportionally slightly more than in January. That £74m of passive equity money splits £95m to -£21m to mutual funds and ETFs, respectively.

 

Flows by Classification

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

Source: Refinitiv Lipper

 

Three of the top 10 classifications for the month are equity, four bond, and two mixed-assets.

Equity Global funds leading inflows is often an indication of risk-off sentiment for the month. February flows show that this isn’t always the case, but rather testifies to the continuing rotation from UK to global equities, both on the conventional and income fronts, with Equity Global and Equity Global Income attracting £935m and £495m, respectively, over the month. As can be seen from the table below, all the former figure and more was accounted for by inflows into three funds from BlackRock, HSBC, and M&G. Passives took a slightly larger share of the Equity Global share, netting £512m to active’s £423m.

 

Source: Refinitiv Lipper

 

Bond GBP Corporate comes in second, with inflows of £847m, as passives took £505m of this. Bond GBP Short Term (£675m), Bond GBP Government (£592m), Bond Global USD (£518m), and Bond USD Government (£370m) all saw significant inflows for the month. Further down the stack, inflation-linked bonds (UK and global) saw combined inflows of £319m. Combined with GBP Short Term, this makes almost £1bn flowing into fixed income assets generally seen as hedges against rising inflation or rates, something that wasn’t a terribly strong characteristic of flows last year.

February saw investors become a little more sanguine over the prospects of recession, and we’ve heard high yield being talked up a little in some quarters. There has been a slight dipping of toes into this asset class, with a little less than £180m going into global HY (GBP and USD) and USD. We’ll be keeping a weather eye on this area of the market in March, to see how this fares over the month.

 

Source: Refinitiv Lipper

 

Mixed Asset GBP Aggressive attracted £874m over the month, beating January’s £350m and continuing its run as the most popular mixed-assets classification, after a year that’s seen lower-risk multi-asset funds struggle because of their bond exposure. It’s Flexible sibling followed with £793m.

 

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

Source: Refinitiv Lipper

 

Note that we’ve removed the £12.5bn of Money Market GBP outflows from the chart to make the rest more readable, as they dwarf the rest of the table, so we pick up with second-placed Equity UK, with redemptions of £1.1bn.

Half the classifications in the above table are equity, with the UK once more over-represented. Equity UK and Equity UK Income continued their negative runs with outflows of £1.1bn and £490, respectively, with UK small and mid caps also shedding £258m. Equity Sector Financials         shed £274m, which seems somewhat prescient given the events in March.

 

Sustainable Fund Flows

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

Source: Refinitiv Lipper

 

Sustainable equity inflows stood at £1.2bn for February, as their conventional peers suffered outflows of £1.6bn. This continues the trend of the past period, which the sustainable outflows of Q422 seem to be a blip. At least for now. This chimes with a comment I heard relayed at a recent conference, where the attitude of European institutional investors is reported as “Article 6? Not interested”. In this, at least, UK investors seem aligned with their continental peers.

The enduring and broad-based appeal of sustainable equity is reflected in February’s top-five money takers, with global, US, and emerging markets all getting a slice of the action.

 

Source: Refinitiv Lipper

 

The situation is a little different with regard to fixed income, with both conventional and sustainable funds both in the black. However, sustainable bond funds are only taking about one-tenth of the assets of conventional funds (£409m to £3.9bn, respectively). Is it because fixed income investors are less green than equity ones? As they’re likely the same people and institutions, this is unlikely. Our best guess is that it’s the relative dearth of passive and sustainable fixed income product—something we’ve harped on about and will continue to do so while this situation lasts.

 

Source: Refinitiv Lipper

 

Somewhat surprisingly, in the light of this, while conventional mixed investment funds attracted £1.5bn this month, their responsible peers shed £68m. Over 12 months, the picture is somewhat different, with sustainable mixed investment taking £890, as conventional equivalents shed £2.1bn.

                                                     

The Sustainable Fund Flows section has a narrower and stricter focus than those which indicate some form of ESG strategy in their fund documentation—to a smaller group 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, February 2023 (£bn)

Source: Refinitiv Lipper

 

M&G Investment led February’s market, with inflows of £2.4bn, with equity products attracting £1.7bn and bond £674m.

 

Source: Refinitiv Lipper

 

BlackRock saw inflows of £2bn: £1.1bn to bond, circa £800m apiece to mixed-assets and bond, offset by outflows from money market and alternatives funds.

 

Source: Refinitiv Lipper

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