Investors continue bonds injection, while ESG funds suffer

The 2023 edition of Calastone’s Global Fund Flows report showed shifting investor sentiments across the global managed funds space, with bonds, environmental, social and governance (ESG) and equities seeing the most changes.

The report found fixed income investors injected over US$22 billion into funds to capitalise on expected peaking interest rate cycles as central banks signal more relaxed policy-making, a significant change of heart from 2022 to make up the then outflows five-fold.

“While geopolitical uncertainty hangs heavy, the promise of higher yields and a favourable capital appreciation outlook proved irresistible around the world,” Marsha Lee, Head of Calastone Australia and New Zealand, said.

“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$3.1bn.”

On the other side, equity funds and ESG-centric funds saw significant outflows, with equities suffering for its second consecutive year to lose US$7 billion to redemptions in 2023.

Investors based in the UK, Europe and Australia seemed to be the most negative about equities, with the latter turning into net sellers for the first time since 2019 after redeeming $724 million in 2023. Hong Kong was the only market to record equity inflows.

“Despite global and Australian equity markets performing well in the first half of 2023, investors only added cautiously between January and April, becoming net sellers for the rest of the year once the AI fuelled tech rally lost steam and bond markets began to price rate cuts. Even strong markets in December were not able to tempt inflows,” Lee said.

Calastone’s report also highlighted the end of ESG’s three-year reign from 2020 to 2022, which recorded US$51.2 billion in inflows, after dropping US$10.2 billion last year.

European investors led the pack, followed by UK investors selling US$1.2 billion in ESG equity funds and Australian investors redeeming US$292 million.

Calastone said this change in sentiment could be attributed to “global concerns over greenwashing and growing awareness that ESG offerings don’t always meet the values and concerns of all investors”.

“Our data shows a determined focus on selling, given sizeable redemptions from smaller pools of ESG funds relative to non-ESG. 2023 was the first year, since we started tracking flows in 2019, that non ESG equity funds have attracted more capital than ESG,” Lee said.