The year ESG went mainstream: Active equity funds welcome strong year-end investment flows

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The year ESG went mainstream: Active equity funds welcome strong year-end investment flows

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By Madeleine Taylor | 13/01/2021 - 1:54pm

Active equity funds celebrated their best month in five years in December, as data from funds network Calastone reveals that half of the month’s GBP1.7 billion investment flows in active equity went towards ESG funds.

The “sudden turnaround” for active funds at the end of 2020 was fuelled by approvals for multiple coronavirus vaccines, also boosting global, North American and European active equity funds.

Edward Glyn, head of global markets at Calastone, says 2020 was a “corona-coaster year for equity funds” and that the final two months of the year were marked by a growing optimism that was reflected by a renewed appetite for active funds.

Active funds had previously been struggling against outflows, as investors withdrew cash in two out of every three months over the last three years.

Glyn adds that active funds “benefit disproportionately” from investors’ rising spirits and increased risk appetite as they scour fund ranges to find the one that meets their needs.

“A lot of the time that now means adding ESG considerations into the mix – no other single strategy has garnered as much in new capital in 2020 as ESG equity funds. Active fund managers will be overjoyed that ESG is now mainstream and represents an area where they have a real edge over passive funds, at least for the time being,” says Glyn.

In December alone, investors bought a record GBP1.1 billion of ESG funds, roughly equivalent to the entire inflows from over three years from 2015 to 2018.

Two thirds of this capital flowed into ESG equity funds. In 2020, more than half of the GBP2.4 billion total flows into equity funds, both passive and active, were directed towards funds focusing on ESG.

UK equity funds saw the swiftest change in investor appetite, as the announcement of a trade deal between the UK and the European Union on 24 December led investors to add GBP148 million to UK funds in the last five trading days of the year.

This followed several months of outflows from UK equities, with GBP2 billion leaving the funds between June and December as negative sentiment was fuelled by the coronavirus pandemic and long-protracted trade talks with Europe.

“Markets with high growth characteristics like Asia, emerging markets and the US have benefited most from the uplift in valuations and this is reflected in fund flows too. Those with low growth characteristics and a high yield, like the UK, have been left far behind both in valuation terms and fund flows. The UK’s particular difficulties handling the pandemic and Brexit have only added to investor distaste for UK assets,” comments Glyn.

The tide began to turn also for European funds, which enjoyed their best ever month with inflows of GBP487 million in December, particularly benefitting active equity funds. European funds had seen outflows for almost two complete years until August 2020.

Equity funds were big winners in 2020, posting total flows of GBP7.5 billion, almost four times as great as in 2019. In the month of December alone, inflows of GBP2.4 billion went towards equity funds.

Positive flows of GBP1.2 billion went towards fixed income funds in December, double the previous month’s total.

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