Last year, a record £4.4bn was paid into money market funds, as high interest rates and low risk proved incredibly attractive to investors.
Money market funds have enjoyed their “best year on record” in 2023, with inflows over the last twelve months exceeding the previous eight years combined, Calastone’s Fund Flow index has found.
Last year, a record £4.4bn was paid into money market funds, as high interest rates and low risk proved attractive to investors.
However, as sentiment towards riskier assets rose sharply in December, inflows to money market strategies fell to £294m, well below the average of the previous six months, Calastone noted.
ESG funds suffered the opposite fate, registering the first year of net selling since the ESG boom began in 2019.
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In 2023, ESG funds shed nearly £2.4bn, with December marking the eighth consecutive month of outflows, at £54m, after investors started turning against ESG in May 2023.
December also saw the biggest surge to equity funds since April 2023, with nearly £1.2bn of inflows. US equities came out as the clear winners, with net inflows more than doubling in December alone to a record £968m.
European equities, however, managed to turn their fortunes around last month after suffering outflows in every month since January 2022. They added a net £476m in December, their second-best month on record.
Calastone said global and emerging funds also posted inflows in December, while the only outliers were UK-focused equity funds, which shed £418m, even though the figure was below their 2023 outflow average of £667m.
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However, the FFI highlighted that, overall, equity funds have shed capital for the second year in a row, mostly due to UK equity strategies, as December's capital injection "was not enough to prevent them suffering annual outflows for a second consecutive year".
Throughout 2023, investors took over £1.2bn from equity funds and, although a "significant improvement" from the £6.3bn withdrawn in 2022, it has meant that 2023 proved to be another hard year for the fund management industry.
For UK equity funds, 2023 marked the third consecutive year of outflows and December was the 31st consecutive month of net selling, Calastone highlighted, with over £8bn pulled from such strategies in 2023 alone.
The FFI also noted that flows into fixed income returned at the end of 2023, following a strong recovery by bond markets, with inflows in December rising to £283m.
Yet the picture for the full year was very mixed, it found. Fixed income funds started the year with strong flows - nearly £4.7bn between January and July - which then faltered in the summer and autumn, with almost no money paid into such strategies.
Investors only returned to fixed income funds in the last two months of 2023, though with relative caution.
Calastone also noted that 2023 was the first year in its own records to see net outflows from mixed asset funds, totalling more than £4.8bn, although outflows reduced to £466m in December.
Property funds continued their outflow trajectory for the fifth consecutive year in 2023, shedding £601m.
Calastone: Fixed income funds suffer from market volatility as investors pull £130m
Edward Glyn, head of global markets at Calastone, said: "The bond markets are still firmly in the driving seat. After the bear market of 2022, investors started the year by trying to lock into high bond yields and the capital gains that would eventually flow from expected disinflation.
"Investors also piled into equities, banking on a rally. That all made sense at the time, but then bond markets detoured into extreme pessimism in the middle of the year over the feared inability of higher interest rates to quell inflation.
"Yields soared even higher - this put capital markets under strain since all asset valuations depend on bond yields, it turned the thumbscrews on government and company finances, and it damaged confidence in the economy."
He said the last few months had seen a "dramatic turnaround" both in the markets and in fund flows as evidence of disinflation "showing up all over the place".
"That means rates might next move downwards. Equities are back on the buy list and that very same fixed income trade - lock into high yield and look for capital gains - is back in vogue too," he added.
However, Glyn admitted the outlook for 2024 is "unusually unclear", due to some central banks' reluctance to signal whether rate cuts are coming, alongside the economic slowdown in the UK and Europe and the uncertainty around whether the US might be able to achieve a soft landing, all of which are "crucial to the outlook for asset prices and fund flows".
