UK investors bought up European equity funds amid a more cautious May for fund flows.
According to Calastone’s Fund Flow Index, overall net inflows to equity funds fell to £525m, representing a £1bn month-on-month fall.
European equities enjoyed their strongest month since June 2024, as investors added a net £369m to their holdings.
Edward Glyn, head of global markets at Calastone, said: “Global markets enjoyed strong gains in May as the Trump administration retreated from its extreme positions on tariffs. Investors bought into the rally but not with any great confidence.
“With so much uncertainty over inflation, interest rates, geopolitics and trade wars, it seems rational for investors to be cautious. Certainly, investors are being selective with where they put their capital.”
See also: May fund performance: Tech funds bounce while bonds suffer
Meanwhile, enthusiasm for both global funds and US equities tempered, with inflows of £546m and £115m respectively.
The inflows marked the US’s second-worst month for flows since September 2023.
Investors continued to sell emerging markets and Asia-focused funds.
UK investors slowed the pace of selling the home market, with £449m outflows at just over half of the average monthly outflow of the last three years.
See also: Pension reform ‘on a grand scale’ expected as ‘blockbuster’ bill published
According to Calastone, the value of buy orders has held steady, so the reduced outflow is being driven by a reduction in selling activity.
“The UK stock market is flirting with the all-time high it reached in February this year,” said Glyn.
“This recovery has not been enough to spur new buyers to reappraise the prospects for UK equities, but it seems to be reassuring some would-be sellers that perhaps the long-awaited re-rating is underway.
“The relentless outflows from UK-focused funds in recent years represented a clear capitulation on hopes for UK shares. It’s too soon to call an end to this trend, but a less negative narrative is a necessary first step.”
Fixed income
Elsewhere, bond funds returned to net inflows for the first time since February.
Investors added £328m to their fixed income holdings, following £1.94bn of outflows between March and April.
Sovereign bond funds benefited most strongly from the improved sentiment, adding £182m in May, while less capital flowed into ‘safe haven’ money market funds.
“Bond yields climbed strongly during May, suppressing bond prices, as concerns over government solvency and inflation took their toll, but they clearly reached levels tempting enough to spur investors to lock new capital into high yields,” Glyn added.
This story was written by our sister title, Portfolio Adviser
