The latest Fund Flow Index from Calastone has revealed that managed equity funds in Australia experienced $516 million of net outflows during Q1 2023, the highest level since Q1 2020.
Calastone reported that Q1 2023 marked the first time of the past three years in which capital left equity funds, following a cautious Q4 2023 in which inflows totalled $296 million.
According to the firm, January initially saw strong buying activity amid rising stock prices locally and overseas, while February more than reversed January’s inflows as global markets sank.
Comments from the US Federal Reserve in early March that higher and faster interest rate hikes were on the horizon cemented selling as the “order of the day”, Calastone said.
However, the firm’s data did not demonstrate any significant uptick in local selling following the collapse of Silicon Valley Bank or takeover of Credit Suisse by UBS, with outflows reported to be fairly evenly spread across the month of March.
Teresa Walker, managing director of Australia and New Zealand at Calastone, said that the ASX had been trading within a range over the past three months, rising and falling in line with global markets.
“It is too early to call a definitive end to the global bear market — rallies in the first quarter mainly reflected a cycle of flurries of optimism that financial conditions were easing, followed by fears they were not,” she said.
“The bigger picture is that, globally, corporate earnings are under pressure and inflation is proving uncomfortably sticky both here in Australia and elsewhere. The Reserve Bank held interest rates steady this month, going into ‘wait and see’ mode and long bond yields are falling indicating fears of a slowdown ahead.”
Calastone noted that Australian investors had demonstrated a clear preference for domestic equities during the quarter, adding $319 million to equity funds investing in shares listed on the ASX while withdrawing capital from every overseas category of equity fund.
The firm reported that the large global sector suffered its first quarterly outflows since the Q2 2020 at a net $617 million. Ms Walker pointed out that investors had drawn a clear dividing line between home and abroad in the first quarter.
“This reflects a clear structural, long-term bias in favour of investing in domestic Australian equities. Over the last four years, domestically focused funds have absorbed more than a third of the $28 billion Australians have added to their managed equity holdings, with almost all the rest flowing into funds investing overseas,” she said.
“This is despite Australian equities accounting for only 2 per cent of global market cap and having a distinct sector bias. From a risk and long-term growth perspective, it’s easy to argue for a more globally diversified approach.”
Turning to other asset classes, real estate experienced a net outflow of $30 million, the first quarterly outflow since Q2 2022, while a total of $664 million flowed into fixed income funds.
“The yield curve has flattened out over the last three months, with longer-term bond yields falling sharply in March, reflecting expectations of slower economic growth. At the same time, short-term yields rose in response to Reserve Bank rate hikes,” said Ms Walker.
“This has generated capital gains for many fixed income investors and led to profit taking in March. Lower yields have also reduced the attractiveness of bonds for new capital compared to six months ago.”
