Rush for the exit: Bear-market rally prompts massive withdrawal from equity funds

Equity funds saw record sell-offs from UK investors in August, according to the latest data from Calastone’s Fund Flow Index (FFI).

Across the month of August, UK investors pulled a record £1.93 bn ($2.22 bn) from equity funds, with Calastone adding that the bear market rally from mid-July to mid-August was outflows of £2.33 bn from equity funds.

‘The outflow easily beat the previous records set in June and July 2016 when the Brexit vote prompted net outflows of £1.54 bn and £1.56 bn, respectively,’ says Calastone. ‘August’s net outflow was driven by a significant increase in selling activity rather than a drop-off in buy orders, indicating a decisive choice to exit holdings.’

Talking about the stock rally that began in July, the firm says UK investors were ‘unconvinced’ by the rise, selling their equity fund holdings into the rally. UK investors withdrew ‘a modest £251 mn’ in the second half of July, according to the data, ‘ramping up’ to £2.08 bn between August 1 and August 17 ‘at which point the rally ran out of steam and share prices quickly deflated again’.

So far this year, equity funds have shed £4.3 bn, says Calastone.

‘Bear-market rallies are often triggered during an extended market decline and have a variety of causes, including short sellers covering their positions, but it is always worth looking at the wider context,’ says Edward Glyn, head of global markets at Calastone, in a statement accompanying the latest FFI data. ‘When central bankers tell you unambiguously how determined they are to squeeze out inflation, even if that means generating a painful recession, it pays to listen. Markets are absorbing the likelihood that inflation will be extremely pernicious and persistent meaning that interest rates will stay higher for longer than initially expected. The combination of a weaker economy and higher rates is very negative for share prices, especially of growth stocks.

‘Attempting to time the market is often a bad idea, but this time UK investors may have played a blinder, jumping ship just as the bear rally peaked.’

Geographical selling and sector buying

The cash-out was seen across all geographies, notes the firm, with UK-focused funds hardest hit. August saw UK investors sell £759 mn from domestically focused equity funds. This was the fifth-worst month on record, says Calastone, adding that all four others have also been in 2022, with UK investors pulling cash from domestically focused funds for 15 consecutive months.

After the UK, the most money was withdrawn from North American and Asia-Pacific focused funds.

North American equities saw the next largest outflow, says Calastone, at a record £426 mn. It was also a record bad month for Asia-Pacific (£234 mn outflow), with the firm citing rising concerns over the Chinese economy and its effects on the regional ecosystem.

It’s not all bad news, however. ‘Sector funds are bucking the trend because of sector-specific factors – infrastructure assets usually come with inflation protection built into operating contracts which helps underpin capital values, while renewable energy generators are making vast amounts of cash as they sell cheap green power at the marginal price set by exorbitant market rates for gas,’ says Glyn. ‘These funds are a tiny part of the UK’s funds market but they are providing a valuable counterweight for some investors in these volatile times.’