UK investors continue to withdraw money from funds focused on environmental, social, and governance (ESG) issues, according to fund network Calastone. This marks the fifth consecutive month of outflows, with September seeing investors withdraw £485 million ($589.4 million) from ESG equity funds. Approximately half of the redemptions came from North American ESG funds, reflecting a political backlash against ESG investing in the United States.

UK investors pull money from ESG funds for fifth month-Calastone https://t.co/8IoF6QvHLg

— Eddy Elfenbein (@EddyElfenbein) October 5, 2023

This comes as investors shift their attention to global funds, which attracted £981 million in new money in September. Emerging market funds also enjoyed continued inflows, bringing their year-to-date total to £2.39 billion. Additionally, UK property funds experienced their first inflows since July 2022 at £2.87 million. This follows a challenging period for commercial property values in both the UK and internationally, as the market adjusted to a higher interest rate environment in the second half of 2022. However, values have seen more modest declines in 2023, bringing greater stability to the market.

Edward Glyn, head of global markets at Calastone, attributes this improvement to a more favorable market environment. Meanwhile, bond funds experienced outflows of £128 million in September, following on from a weak August when investors withdrew £330 million. The bond markets are currently driving investor sentiment, with factors such as inflation and interest rates impacting bond yields and subsequently affecting stock market valuations. The interconnected nature of bond and equity markets has resulted in periodic rallies and sagging markets.

Clear signs of sustained disinflation and a definitive turn in the interest rate cycle are factors that market bulls are currently hoping for. Equity funds also saw outflows for the fifth consecutive month, with £206 million pulled in September. However, this represents the least severe outflows since February. UK-focused equity funds experienced the largest outflows, with £448 million redeemed, while North American fund sectors saw net outflows of £285 million. Glyn notes that the aversion to UK equities is a structural trend that both domestic and international investors are reluctant to break, despite attractive valuations.

The bear market in 2022 marked the beginning of outflows from North American funds. Mixed asset funds had their worst month on record, losing £1.04 billion. The evolving trends in equities and bonds have resulted in a risk/reward profile that is no longer attractive for mixed asset funds. Similarly, ESG funds have also experienced outflows for the fifth consecutive month, with investors redeeming £485 million from their ESG equity holdings, with almost half of the redemptions coming from North American ESG funds.