Key facts
- UK investors poured over £1 billion into bond funds in June, marking the third-strongest month on record for fixed income.
- Equity funds suffered net outflows of £437 million in June, with the Asia-Pacific region experiencing the largest sell-off.
- High equity valuations, driven by AI and tech concentration, are prompting investors to rebalance portfolios towards defensive assets.
- Property fund outflows eased to £6.1 million, with expectations of falling interest rates potentially boosting the market.
- Active fund management is seen as a way to avoid the 'concentration trap' in passive investing due to mega-cap stock dominance.
UK investors significantly increased their allocation to bonds in June, driven by concerns over stretched equity valuations and a desire for income and portfolio diversification. Bond funds saw net inflows exceeding £1 billion, marking a record period for fixed income.
This shift occurred as equity funds experienced net outflows totaling £437 million for the month. The Asia-Pacific region was particularly affected, with investors selling £312 million of holdings, marking 38 consecutive months of outflows. UK-focused funds also saw outflows of £260 million, reversing previous gains.
Edward Glyn, head of global markets at Calastone, noted that bonds offer an attractive combination of high income and potential capital gains if interest rates decline. He also cited geopolitical tensions, economic uncertainty, and elevated equity valuations as reasons for investors to bolster the defensive aspects of their portfolios.
Concerns are mounting over market concentration, with AI and tech companies dominating index performance, particularly in the S&P 500. This concentration poses risks for passive investors whose funds are weighted by market capitalization. Industry figures are advising caution regarding upcoming IPOs from AI companies like OpenAI and Anthropic.
In contrast, property funds saw outflows ease to £6.1 million, down from £14.8 million in May. This trend suggests a gradual rebuilding of confidence, potentially influenced by expectations of lower interest rates and attractive property yields, although a decisive turning point has not yet been reached.