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September 13, 2023

Everything Flows, July 2023: Investors Turn to Passive GBP Govt Bonds

by Dewi John.

UK Passive govvies net £1.56bn as flows continue to favour fixed income

Asset class view

  • Bond funds saw the largest net inflows, taking in £2.75bn
  • Money market funds saw the largest outflows of £1.48bn

Active v passive

  • The most successful passive asset class was bonds, with inflows of £2.521bn
  • Passive equity mutual funds suffered outflows of £591m, with their ETF peers attracted about £167m


  • Bond GBP Government was the best-selling classification, taking £1.59bn, followed by Mixed Asset GBP Flexible
  • Investors withdrew £1.52bn from Equity UK funds


Sustainable fund flows

  • Bond funds saw the largest inflows for the month, netting £217m—albeit a fraction of their conventional peers
  • Sustainable mixed asset funds saw outflows of £102m, despite the £279 inflows for their conventional equivalents


Asset manager view

  • M&G was the top-selling fund manager, netting £2.72bn

Flows by Asset Class

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

Source: LSEG Lipper


July saw the Bank of England’s Monetary Policy Committee raise the base rate by a further 25 basis points (bps), in line with expectations. Whether there is further to go, and how much, will largely depend on the persistence of core inflation on the one hand, which still seems stubborn enough to worry the MPC, counterbalanced by GDP growth on the other. That the yield curves of most developed markets remain inverted indicates that fixed income investors are not overly confident on the resilience of the latter. Indeed, too aggressive rate rises by central banks could catalyse recession, in which case it will be a case of the operation was a success, but the patient died.

Year to date, there have been negative flows of £37.21bn from UK mutual funds and ETFs. However, £42.52bn has left money market funds, meaning long-term assets have attracted £5.31bn YTD. Most of this has been to bond funds, which have taken £11.72bn over seven months, and £8.09bn into mixed asset funds, counterbalanced by the £10.55bn of redemptions from equity funds. Alternatives (-£2.49bn) and real estate (-£1.05bn) have also seen outflows over the year so far.


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

Source: LSEG Lipper


As base rates have risen this year, holding cash has become more attractive, at least in nominal terms, while bond holders have continued to suffer in direct relation to the duration of the assets they hold. This isn’t reflected in the strong positive flows for bonds (£2.75bn) and negative ones for money market products (-£1.48bn).

Aside from June’s blip of money market funds into positive territory, July’s flows were similar to the previous month. So my earlier speculation that we might have seen the effects of the mini-budget finally wash out seems to have been premature. Most (£2.51bn) of the bond assets have gone to passive funds, which again continues the pronounced trend of the past few months to fixed-income trackers.

Equity funds saw outflows of £934m, split £530m active and £424m passive.

The £481m outflow from commodities is unusually large, and this is itself largely from one fund.



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

Source: LSEG Lipper


It was another good month for both passive bond mutual funds (£1.16bn) and their ETF equivalents (£1.35bn). Again, as in June, passive equity mutual funds shared in the pain of the asset class overall (-£591m), their ETF peers did rather better, netting £167m. Overall, passive vehicles took in £1.67bn in June, with ETFs taking £1.56bn of this.


Flows by Classification

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

Source: LSEG Lipper


Bond GBP Government moves up the rankings from second best seller in June to first in July, netting £1.59bn. As indicated by the table below, iShares has swept up here, with investors moving into government trackers, with something of a bent to the shorter—zero to five years—maturities. Bond GBP Corporates (£849m), Bond Global Corporates LC (£672m), Bond Global USD (£433M) and Bond Europe (£403m) have also proven popular in the fixed income space, and it’s likely investors are seeking to lock in historically attractive yields as they keep a weather eye on central banks’ rate moves, in the hope that terminal rates are not far off.


Source: LSEG Lipper


Mixed Asset GBP Flexible (£1.11bn) and Aggressive (£958m) have also proven popular, with multi-asset flows going consistently to the more equity-heavy classifications. Ove the past few years, with wafer thin yields and then a bond market washout last year—this has proven a sensible course. However, I do wonder, with yields widening as global growth teeters, if this is the asset mix that will come through over the coming period. Past performance being no guide to the future, and all that.


Source: LSEG Lipper


Chart 5: Largest Outflows by LSEG Lipper Global Classification, July 2023 (£bn)

Source: LSEG Lipper


Given the aggregate flows (chart 2), it’s a little surprising that Money Market GBP has seen the largest redemptions for the month (-£166bn). UK equities continue to shed assets whatever investor sentiment, with Equity UK shedding £1.53bn and Equity UK Income losing a further £277m.

As noted above, the less equity heavy mixed asset sectors are not faring so well, with Balanced and Conservative GBP seeing combined outflows of £1.68bn.


Sustainable Fund Flows


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

Source: LSEG Lipper


A broadly similar trend to June in July, with inflows to sustainable equity despite outflows for their conventional peers (£62m v
-£1.02bn), with the converse being true for mixed assets (-£102m v £279m). Sustainable bond flows have returned to positive territory (£217m), although this is dwarfed by the flows to conventional bond funds (£2.53bn). As is implied by the relatively small flows to sustainable bonds, allocations at the fund level are fairly modest, albeit across a broad range of classifications, as indicated in the table below.


Source: LSEG Lipper


Allocations to sustainable equity funds are also fairly diverse, with top money takers being emerging markets and US, alongside the perennial favourite of global equity.


Source: LSEG 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, July 2023 (£bn)

Source: LSEG Lipper


M&G Investments was the top-selling fund manager in July, netting £2.72bn over the month. Best-selling sectors were equity (£1.69bn), bond (£819m), and mixed assets (£208m).


Source: LSEG Lipper


Royal London came second, attracting £1.22bn. This was mainly accounted for by £1.13bn inflows to money equity funds, and £609m to mixed assets.


Source: LSEG Lipper

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