The £1 billion surge into bond funds by UK investors last month represents a significant shift away from equity markets, as concerns over valuations mount. According to data from Calastone, net inflows into fixed income funds reached their third-strongest level on record in June. This trend mirrors the first six months of 2024, during which £2.2 billion flowed into bond funds, while equity funds experienced outflows totalling £2.6 billion.
June saw a particularly stark reversal, with net outflows from equity funds reaching £437 million, compared to an inflow of just £37 million the previous month. Regionally, Asia-Pacific funds suffered the largest losses, with investors withdrawing £312 million in June, marking 38 consecutive months of outflows. UK-focused funds also saw a significant withdrawal of £260 million, a stark reversal from May's minor inflow.
Edward Glyn, head of global markets at Calastone, attributes the bond fund bonanza to an attractive combination of high income potential and capital gains, should interest rates decline. He notes that geopolitical tensions, economic uncertainty, and elevated equity valuations are driving investors to bolster their portfolios' defences.
The increasing concentration of market gains within a small number of companies – particularly those in the artificial intelligence (AI) sector – has raised concerns among asset managers. This 'concentration trap' means passive investors tracking market capitalisation could be disproportionately exposed should dominant stocks experience a downturn. As AI giants like OpenAI and Anthropic prepare to list, industry figures are cautioning investors against complacency.
Meanwhile, property funds saw outflows ease to £6.1 million in June, their smallest monthly decline since May 2024. This trend suggests that expectations of lower interest rates may be attracting buyers back into the commercial property market, although challenges persist in the broader housing market.