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Where did most of the investing capital go in 2023?
Net fund flows are driven more by changes in appetite to buy rather than sell
Markets falling isn’t always a case of investors selling, but a lack of investors buying.
As the key driver of transaction volumes, it follows that changes in appetite to buy also largely determine net fund flows. Of course, over the medium and long term there is a structural bias towards inflows, at least while most economies are still in the saving and wealth accumulation phase.
But in the short term, when market conditions are weak, buyers tend to go on strike. Even if there is little or no change in selling activity, that can quickly turn net fund flows negative.
In 2022, when the global bear market began to bite, sell orders did not rise as one might reasonably expect, yet there were nevertheless significant outflows of capital from equity funds ($13.3bn) — following especially strong inflows in 2021. In fact, the value of sell orders in equity funds fell by 4.3%, or $12.7bn compared to 2021, but the value of buy orders fell even more — down by 23% or $78.7bn. Some of this reflected lower asset values of course, but the primary driver was order volume.
Calatone has just released its ‘Global Funds Flow Report’ which shares data on where the money went in 2023.
The pattern of 2022 repeated in 2023, but less starkly — the value of buy orders rose 6.2% while net selling rose by 3.7% — the result was a reduction in outflows to $7.1bn.
Fixed Income funds were in favour for most of 2023, after a difficult year in 2022 when the bear market drove significant outflows. But those outflows took place entirely because buying fell away — down by a fifth in 2022; the value of sell orders was almost exactly flat year-on-year.
Overall moves are larger and markets more volatile in the US where order sizes are significantly greater than anywhere else. They also favour the equity market more than the rest of us. US capital tends to end up in US companies.
Investors withdrew capital from equity funds in 2023 and were especially negative from May onwards
2023’s outflow of $7.1bn from equity funds was significantly better than the $13.3bn of redemptions in 2022, but we still saw outflows. Two years of net selling is certainly unusual. In the UK, we have never seen two negative consecutive years since Calastone began compiling figures in 2015.
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, with the exception of a small flurry of optimism in November. Even strong markets in December were not able to tempt inflows.
If we look across different territories, investors in the UK and Europe have been the most negative, though the outflows were significantly smaller year-on-year. We saw net outflows from equity funds on the Calastone network of $1.8bn in the UK (one-fifth of the level the year before) and of $1.6bn in Europe, (one-sixth of the level in 2022)
Active vs Passive
Notably, index tracking funds were strongly back in favour in 2023. They attracted inflows of $20.1bn, while active funds shed $27.2bn. In 2022, both strategies saw outflows, though active funds suffered more, while 2021 was a rare year in which active funds did significantly better — inflows of $40.3bn were more than three times larger than for passive funds. Over the last five years, passive funds are easily ahead. Investors have bought a net $53bn of passive funds, and just $1.7bn of active ones.
Overview:
Fixed Income
- Investors were keen to lock into high yields — net inflows totalled $22.2bn in 2023, driven by a one-quarter increase in buy orders against no change in appetite to sell
- Investors everywhere were more positive on bond funds -Asian investors saw the biggest reversal of sentiment, switching from strong net selling in 2022 to strong net buying in 2023
Equities
- Investors withdrew $7.1bn of capital from equity funds in 2023, and were especially negative from May onwards, but the outflow for the year was just over half the level seen in 2022
- UK and European investors were the most negative in 2023
- Outflows from equity funds across Asia were more modest
Active v Index
- Passive funds were back in fashion in 2023, attracting net inflows of $20.1bn while active funds shed $27.2bn
ESG Backlash
- After a three-year ESG boom with $51.2bn of inflows (6x more than non-ESG funds), ESG funds shed $10.2bn in 2023
- European investors turned away from ESG first, but we now see the trend across our global network
It will be interesting to see what this looks like at the end of 2024. Particularly if we witness a lot of volatility in coming months.
