Calastone report shows equities, ESG and property are out of favour with investors

The latest figures from the Calastone Global Fund Flows Report 2023 are in, and they don't paint a positive picture for active managers.

This aligns with other measures, including the ASX’s comparison of investor flows in exchange-traded funds (ETFs) versus active funds. As we noted last month, for the first time, the total assets under management in passive funds in the US were larger than for active funds in 2023 – albeit narrowly. Passively managed funds – including ETFs and index funds – held US$13.29 trillion at the end of 2023, versus US$13.23 trillion held in active funds.

What is the study?

Measuring the movement of capital into and out of managed funds, Calastone’s Fund Flow Index tracks transactions between financial advisers and investment platforms.

It showed that fixed income investors poured more than US$22 billion into funds globally, reflecting the overwhelming view that interest rates have peaked. This contrasts sharply with the previous year, when the buying of units in bond funds was down by around 20%, versus an increase of around 25% in 2023.

“While geopolitical uncertainty hangs heavy, the promise of higher yields and a favourable capital appreciation outlook proved irresistible around the world,” said Marsha Lee, head of Calastone Australia and New Zealand.
“Australian investors have shown a very high conviction in fixed income funds, bucking the outflow trend in 2022, and ramping up investment five-fold in 2023 to U$3.1 billion.”

The most pronounced reversals here were seen in Hong Kong, Europe and Taiwan while in the UK, inflows more than doubled.

What happened to equity funds?

Active equity funds saw US$7.1 billion of outflows last year, but it was an improvement compared to 2022 when this figure was US$13.3 billion.

Two consecutive years of net selling is unusual. In the UK, where Calastone’s data gathering dates back to 2015, two back-to-back negative years have never occurred.

“Despite global equity markets doing well in the first seven months of 2023, investors only added funds cautiously between January and April, before becoming net sellers for the rest of the year, except for a small flurry of optimism in November. Even strong markets in December were not able to tempt inflows,” the report notes.

Across different regions, investors in the UK and Europe were the most negative. US$1.8 billion of capital flowed out of UK funds, and US$1.6 billion in Europe – 1/5th and 1/6th lower than in 2022.

Asian equity funds held up better, with modest outflows of US$376 million roughly in line with the prior year. Singapore was the region’s worst for active funds, its fund flow index reading of 48.3 is the worst in Calastone’s five-year history covering the Lion City.

In Australia, 2023 marked the first year of net outflows for active funds according to Calastone’s records, with US$724 million leaving funds. “Australians were net sellers in six of the last 12 months,” the report notes.

What does this mean for investors (and asset managers)?

Calastone’s head of global markets, Edward Glyn, noted the latest findings would likely place increasing pressure on the fees that funds charge.

“As demographics evolve, investors have very different expectations of how they want to interact with those providers of savings and investments – they want a seamless digital experience with fast settlement times,” Glyn said.

“Investment products and the infrastructure fund managers and platforms use (and expect investors and their advisors to use) are not keeping up with this change.”

Passive funds are back

At the other end of the ledger, index funds grew by $20.1 billion in 2023 – versus the US$27.2 billion shed by active funds. This marks a reversal of last year, when both strategies were negative, although active funds fared worse.

There have been a few big shifts in recent years, with 2021 displaying a rare period of positive inflows across both active and passive – though passive inflows were three times higher at US$40.3 billion.

“When averaged over five years, passive is easily ahead. Investors have bought a net US$53 billion of passive funds and just US$1.7 billion of active funds,” the report states.

What about environment, sustainability and governance?

ESG funds went backwards last year, to the tune of US$10.2 billion of net outflows. Across the board, ESG-focused funds lost investor money in every territory where Calastone operates.

This is a stark contrast to prior years when US$51.2 billion was added to ESG funds between 2020 and 2022.

“About 80% of this was actively managed and proved a boon for active fund managers, offsetting outflows from traditional actively managed funds by a factor of three to one,” says the Calastone report.

“Astonishingly, the US$51.2 billion added to ESG equity funds was more than six times the amount of capital invested committed to equity funds without specific ESG commitments over the same period.”

Calastone attributes this shift primarily to the numerous instances of “greenwashing” uncovered, and “an increasing realisation that ESG is simply too vague to meet investor concerns.”

“Whether it’s because people don’t really believe companies are walking the ESG walk, or are losing faith in the fund management industry’s ability to effectively differentiate between companies that meet the highest standards and those that do not, there has been a clear break in the trend – 2023 is the first year since at least 2019 that non-ESG equity funds have attracted more capital than ESG,” says the report.

Property sector challenges continue

Property funds were also on the nose with investors in 2023, with US$629 million of investor money leaving these investments during the year. This brings the outflows to US$6.5 billion since 2019.

The low point for commercial property was 2021, in the depths of the pandemic, when investors realised that the rising level of “work from home” was becoming entrenched.

“Thereafter, the relentless climb in interest rates around the world from the beginning of 2022 has meant that investors have no longer had to look much beyond cash if they want an income, while higher long-term interest rates have impacted asset values,” says the report.

“Equally, a weaker economy is bad news for the property sector too, as it suppresses rental demand.”

What's your opinion?

Are you one of the thousands of investors who pulled their money out of funds last year Where have you focused your investment dollars instead? Tell us what you think in the comments below.