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May 23, 2023

Everything Flows, April 2023: UK Equity Income Goes from Red to Black

by Dewi John.

Turnaround driven by strong sales for JOHCM fund

 

Asset class view

  • Money market funds sold off at the fastest rate since January, with outflows of £1.47bn
  • Equity funds had their highest sales since November, attracting £4.3bn

 

Active v passive

  • Active bonds outsold passives (£1.43bn to £1.01bn), stalling the recent trend of active to passive fixed income
  • Bond ETFs took about 60% of fixed income passive allocations, at £603m

Classifications

  • Equity UK Income netted £1.32bn after a lengthy period of heavy outflows, shedding, £3.75bn over the past year alone
  • Bond GBP Short Term funds have seen outflows of £165m, despite positive macro conditions for the classification

 

Sustainable fund flows

  • Equities were the largest sustainable asset class by flows in April, taking £1.4bn, although sales lagged their conventional peers
  • Sustainable bond funds sold a relatively modest £318m, compared to the £2.12bn that went to their conventional equivalents

 

Asset manager view

  • JOHCM was the largest selling fund manager, with £2.83bn of net flows, driven by two UK equity funds

 

Flows by Asset Class

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

Source: LSEG Lipper

 

The FTSE 100 rose over the course of April, as did the year on the 10-year gilt, despite investors becoming increasingly alarmed at the inversion of the yield curve: taken as a harbinger of recession in much the same way as running into three old ladies on a foggy Scottish moor prefigures lots of dead aristocrats in the country.

However, investors can’t be that anxious, as they’re selling money market funds at the fastest rate since January while piling into equities for the second month straight, and at the fastest rate since last November (£5.65bn for November versus £4.3bn in April).

The move out of cash is likely driven by two factors: the corrosive effects of inflation on the asset class, and pension funds still likely being overweight after dashing for cash in the wake of last September’s mini budget.

 

 

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

Source: LSEG Lipper

 

Equity funds’ strongest month in terms of flows was split £2.6bn to active and £1.7bn passive. Active bonds also outsold passives, by £1.43bn to £1.01bn, respectively. The latter, in particular, is something of a turnaround, as there has been a significant flow from active fixed income to index trackers for some time. Anecdotally, this seems to have been driven (in part at least) by professional investors wanting to increase their bond market exposure—but to do so in a transparent fashion and get out quick should the market shift. A bond ETF fits the bill pretty well to implement this view. The return of the active bond fund may indicate that investors believe the market may be settling and are starting to think of their fixed income allocations in a more strategic way. Or it could be a blip. But it’s certainly an interesting change, and something on which we’ll be keeping an eye.

Meanwhile. Mixed-assets tick along, taking £1.15bn for the month, while the other asset classes are barely a pixel’s width on
Chart 2.

 

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

Source: LSEG Lipper

 

Bond ETFs took about 60% of fixed income passive allocations in April, at £603m. The bulk of this went to Treasuries and gilts and short-dated funds. On the equity front, ETFs took just 8% of flows, with mutual funds hoovering up £1.56bn, with the top money-takers being spread across large cap global, UK and US trackers, with ESG funds making a decent showing (see Chart 6 below for more details).

 

 

Flows by Classification

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

Source: LESG Lipper

 

Equity Global enjoyed the largest inflows for the month (£1.88bn), split £1.06bn active to £811m passive (see table below).

 

Source: LESG Lipper

 

However, the real news is that Equity UK Income is in at the number two slot, netting £1.32bn. UK equity funds have seen persistent outflows, with their income iterations particularly suffering. Indeed, the classification has shed £3.75bn over the past year. We have recently pondered whether it’s time to for this strategy to make a comeback, and this might just be it. That said, various share classes of one funds—JOHCM UK Equity Income—account for £1.5bn of flows, with two M&G funds pulling in £136m. Outside of this, there is still little action, although it has to be stressed, we haven’t seen positive flows such as this, to this corner of the market, for a long time.

 

Source: LESG Lipper

 

Meanwhile, it’s of note that Mixed Asset GBP Aggressive continues to dominate mixed asset flows, netting £903m, with its Flexible sibling also attracting £469m.

What’s also of considerable interest is the £295m of flows into Alternative Credit Focus. This, as the name suggests, covers multiple strategies, one of which is funds investing in asset-backed securities. These saw heavy outflows in 2022, likely as a result of fears over the weakness of the consumer market and bad memories of ABS’ performance in the global financial crisis. More than £200m of the net flows have been to these funds.

 

 

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

Source: LESG Lipper

 

We have removed the £14.61bn of Money Market GBP outflows from Chart 5, as they dwarf the other elements of the chart.

Equity UK has not partaken of the success of its Income peer this month, and has seen outflows of £214m—although £279m went into active vehicles.

And, while other bond classifications have faired well this month, such as Bond Global USD and Blond Corporate GBP, Bond Global GBP has not been so favoured, with outflows of £743m.

What is perhaps most interesting here is that, although yield curves are either flat or inverted, Bond GBP Short Term funds have seen outflows of £165m, which seems a little surprising, as by definition you should make more on short dated than further out on the curve, and with less risk. Indeed, over the past year or so it’s been something of a puzzle why this classification hasn’t attracted cash, losing about £2bn over the year.

 

Sustainable Fund Flows

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

Source: LSEG Lipper

 

Equity funds were the largest sustainable asset class by flows in April, netting £1.4bn. As you can see from the table below, tracker funds have taken a considerable slice of this, although spread across a number of geographies. What’s notable is that they have sold less than conventional equity funds, which saw inflows of more than twice this, at £2.9bn. Aside from Q3 2022, sustainable equity funds have tended to outsell their conventional equivalents, despite the drag that’s impacted the former’s performance from the outperformance of value stocks. This, despite the rally of growth in the year so far.

 

Source: LESG Lipper

 

Sustainable bond funds sold a relatively modest £318m (see table below), compared to the £2.12bn that went to their conventional equivalents. However, what is noteworthy is the paltry level of sustainable mixed-assets funds compared to their conventional peers: just £4m, versus £1.15bn. Go back a year or two, and sustainable funds were taking a large slice of the sustainable universe.

 

Source: LESG Lipper

 

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, April 2023 (£bn)

Source: LSEG Lipper

 

JOHCM is the top-selling fund management company in April, netting £2.82bnbn, driven by two funds: its UK Equity Income (covered above) and UK Dynamic, an Equity UK fund (see table below)

 

Source: LSEG Lipper

 

M&G followed close behind, with £2.62bn of sales—also with an (albeit global) equity income leader. Its biggest-selling asset classes were equity (£1.66bn) and bond (£854m).

 

Source: LSEG Lipper

 

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