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Outflows from retail property funds extended to £2.6 billion over 13 months despite revived investor optimism

Calastone’s Fund Flow Index (FFI), which tracks retail capital investment fund transactional activity across IFAs, platforms and institutions, showed that a change in sentiment led to investors hit the pause button on their flight from equity funds. However, higher risk funds – including property funds – remained firmly out of favour.

The change in investor sentiment towards fixed-income funds was particularly marked, according to Calastone. As a perceived relative safe haven, bond funds have benefited all year from investor concerns over Brexit and the global economy, attracting a net £4.2bn of inflows between February and September. A jump in bond yields during October (pushing the price of bonds down) accompanied a sudden moment of progress on Brexit and a brief surge of optimism over US-China trade tensions. Optimism is bad for bonds, so for the full month, investors sold down a net £164m of their fixed-income funds, the first month of net outflows since January 2019.

Brexit newsflow was the key determinant. After modest inflows to bond funds until 17 October, the announcement that Boris Johnson had secured an amended version of May’s EU exit agreement spurred an immediate and very large reversal. UK investors sold bond funds heavily, dumping £162m on 18 October alone, with a similar amount again over the following week. However, the announcement of a UK election, combined with developments on world markets slowed the exodus by the end of the month. Chinese doubts about the trade outlook, a rate cut from the Fed, and the shelving of the Withdrawal Agreement Bill all encouraged capital to trickle back into bond funds in the final days of October.

October saw no respite for property funds. The sector lost a net £204m, and the FFI: Real Estate fell to 31.0, its fifth-lowest reading on record. Investors have now withdrawn money out of real-estate funds for a record 13 consecutive months.

Edward Glyn, head of global markets at Calastone, explains:

“Despite a slight improvement in October, it’s too soon to call a turning point in investor appetite to commit capital to riskier assets. Uncertainties abound and that is likely to weigh on sentiment in the months ahead.

“Fund flows are marked by sudden squalls, shifting tides and long-range currents. The shifting tides occur over the economic cycle as investor thinking adapts to the ebb and flow of economic activity – the move out of real estate funds is a case in point. It is the sudden squalls that are the big events that intrude and drive opportunistic trading, such as the reaction to the UK government’s unexpected October announcement of a Brexit withdrawal agreement.

“The sensitivity investors are showing day-by-day to the Brexit crisis shows that and signs that a clear solution may pass through Parliament, one way or the other, there is likely to be a marked shift in appetite for UK assets. The outcome of the UK election will provide the first indication of how likely that will be.”

james.wallace@realassetmedia.com