Omicron prompts ‘abrupt’ sale of equity funds, shows latest Calastone data

The arrival of the new Omicron variant of Covid-19 has prompted swift action from investors, with Calastone reporting an £83 mn ($110 mn) sell-off of equity fund holdings in just two days.

The firm’s latest Fund Flow Index (FFI) shows that although equity funds saw overall net inflows for November, the picture had shifted starkly by the end of the month.

‘Equity funds saw inflows overall in November, but the headline figures disguised record selling for North American and European equity funds, among others,’ says Calastone in its FFI report.

‘As governments slapped new restrictions on travel and reimposed mask mandates, investors reacted swiftly, selling £83 mn of their equity fund holdings on Friday, November 26 and Monday, November 29. The overall volume of transactions leapt by 60 percent between Thursday and Monday as investors adjusted their holdings to reflect their first assessment of this latest episode of the pandemic.’

But Calastone noted that it is too soon to assess the impact of the new variant on markets, saying it was expecting further volatility in coming weeks. Noting the continued impact Covid-19 has on both market sentiment and fund flows, Edward Glyn, head of global markets at Calastone, described the recent sell-off as ‘measured’.

‘The spasm at the end of the month that saw a sudden rush for the exits and a spike in trading volumes was a clear reaction to Omicron’s discovery, though the selling was measured, rather than a rout,’ Glyn says in a statement accompanying the data. ‘Meanwhile, the record outflow from European equity funds reflects the vicious fourth wave that was already sweeping through many countries and the imposition of new restrictions, even before Omicron appeared on the scene.

‘Europe’s inflation problem isn’t helping either. For US equities, we suspect the outflow is also linked to the surge in bond yields, to which US equities are very sensitive. All of this adds up to greater risk aversion.’

Glyn says that until the impact of the new variant becomes clear, ‘volatility will continue to be a clear theme’.

‘Incredible and undiminished success of ESG’

Despite the end-of-month sell-off, equity funds saw inflows totaling a net £528 mn for November, though Calastone notes this is just a third of the average for the last 12 months, with the firm adding that the positive inflow ‘disguises a growing increase in risk aversion among investors’.

This becomes clear when you look at specific categories, it points out: November was the worst month on Calastone’s record for US and European equity funds, with a net outflow of £395 mn and £534 mn, respectively, it says. At the same time, outflows from UK-focused equity funds reached £464 mn. That was the sixth consecutive month of net selling for UK-focused equity funds and marked the sixth-worst month on record.

Bucking the trend, however, are ESG-themed funds. In fact, Calastone says it is only down to the ‘incredible and undiminished success of ESG funds’, which enjoyed record inflows of £1.5 bn, that equity funds recorded overall inflows while so many categories saw sell-offs.

‘Equity funds with no ESG mandate suffered outflows of £1 bn for the second month in a row,’ says the firm. ‘Indeed, November was one of the worst months Calastone has seen for non-ESG funds.’

Commenting, Glyn says ESG themes continue to ‘capture investor imagination’. ESG is ‘clearly cannibalizing other types of funds now in the race for new capital,’ he says. ‘When investors have cash to add, they add it to ESG, and any impulse to sell is felt by other categories.’

Calastone has analyzed more than 1 mn buy and sell orders every month since January 2015.