Covid-19 third wave fears dampen enthusiasm for UK funds

Time will tell whether UK funds will fall out of favour following the four-week lockdown extension.

Nervousness about a third wave of Covid-19 negatively impacted UK fund demand in May, according to global funds network Calastone.

Overall, it was another positive month of inflows for UK funds since more money was put in than withdrawn, with £147 million invested. But from 11 May onwards, UK funds were hit by outflows, as Delta variant infection levels accelerated. The amount invested in UK funds was sharply reduced compared to March and April, which between them had inflows of £907 million.

Edward Glyn, head of global markets at Calastone, notes: “A lot of hope has been baked into UK-focused equity funds since the end of January as the rapid vaccine roll-out raised hopes of release from Covid-19 restrictions.

“Certainly, the economic data from purchasing manager tracking, economic growth and retail footfall is extremely encouraging, even if the infection numbers are going in the wrong direction.”

Last night, the government said that current coronavirus restrictions will not end on 21 June and will instead remain in place for another four weeks until 19 July. Prior to the announcement, Glyn said that any reversal of outflows that began in mid-May depended on whether the government adhered to the 21 June full lifting of lockdown.

Overall, the consensus is that the UK market, and by extension UK funds and investment trusts, look well placed to continue their strong run of form. The vaccine announcements at the end of 2020 proved to be the catalyst for UK equity funds and trusts returning to form following a challenging period due to uncertainty over Covid-19 and Brexit. On the whole, the UK market has a bias towards cyclical companies, which have benefited from the improved outlook for the UK and global economy.

• Why the rally for UK funds and investment trusts has further to go 
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Among interactive investor customers, there has been an uptick in demand for UK funds, investment trusts and exchange-traded funds (ETFs) in recent months.

In May, MI Chelverton UK Equity Growthentered our top 10 most-popular funds' league table. It joinedMarlborough Nano Cap Growth, which was already in the top 10, and was the fifth most-bought fund during the month, climbing three places in the rankings compared to April.

In regards to investment trusts, there was just one UK representative, City of London (CTY) in the top 10 for May. The trust, which has raised its dividend for 54 consecutive years, re-entered the top 10 in March after departing last November.

Elsewhere, the iShares Core FTSE 100 ETF (LSE:ISF) was the most popular ETF in April and May. Further demand for UK-focused ETFs is evident in the top 10, with the Vanguard FTSE 100 ETF (LSE:VUKE) in fourth place and the Vanguard FTSE 250 ETF (LSE:VMID) in fifth place.

• Top 10 most-popular investment funds: May 2021 
• Top 10 most-purchased ETFs in May 2021 
• Top 10 most-popular investment trusts: May 2021 

More than two-thirds of UK fund flows by value pass across the Calastone network each month, the group says. It monitors transactions by UK-based investors, placing orders for funds domiciled in the UK using primarily retail investor money. 

Calastone’s data shows investors increased exposure to emerging market funds in May. Such funds saw the second-highest inflow on record in May of £256 million, but global funds proved the most popular, attracting £1.25 billion.  

Elsewhere, actively managed funds continued to outsell passive funds. Active funds received inflows of £1.6 billion, almost three times as large as the £580 million that investors committed to their passive counterparts. Active funds have now beaten their passive rivals in six of the last seven months, having done so only twice in the previous two years, notes Calastone.