Middle East tensions caused fund flow pause in June – where did investors put their money?

War in the Middle East appeared to deter investors from the stock market in June but caused more of a pause than a panic.

The latest Fund Flow Index from Calastone shows a net £98 million was withdrawn from equity funds last month while more money went towards fixed income and safe haven markets as well as lower-cost passive funds.

There was plenty to spook financial markets in June, such as tensions between Israel and Iran and US interventions, which eventually led to a ceasefire.

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There was also the ongoing Russia and Ukraine conflict as well as fears around Trump tariffs and economic uncertainty closer to home in the UK.

However, Calastone said the equity dip is more due to investors purchasing less rather than selling more.

The value of sell orders for equity funds actually fell by 2.5% in June to £11.4 billion, but the value of buy orders fell by more at 7.5% to £11.3 billion, the lowest level since September 2023.

Edward Glyn, head of global markets at Calastone, said: “June was characterised by caution, not fear.

"A net outflow from equity funds as an asset class is relatively rare as we have a structural bias towards adding to our savings – just one month in five over the last 10 years has ever seen investors withdraw capital – so any outflow is noteworthy.

"But it was modest in June – a £98 million withdrawal is vanishingly small in the context of £22.7 billion of total transactions.

“On the one hand investors were naturally worried by the outbreak of a war with unpredictable consequences and on the other they were reassured by global stock indices being relatively unmoved. They dropped a little at first before ending June ahead, while bond markets rallied throughout the month.

“Investors weighed the uncertainty, but did not panic.”

Find out the most popular funds in June here.

Flight to safety

UK-focused and global funds fared worse amid investor uncertainty in June.

Calastone observed a £594 million net outflow from funds investing in UK equities, which it said is part of a long-term structural trend of monthly selling by UK investors.

There was also a £365 million outflow from global equity funds, which is the first time net selling has occurred since Liz Truss’ mini-budget in September 2022 and only the fifth month on Calastone’s more than ten-year record.

In contrast, European equity funds benefited from £301 million of inflows in June, while £306 million went into North American finds.

Meanwhile, bond funds saw inflows fall to £195 million from £328 million in May and safe-haven money markets saw inflows rise to £218 million from £85 million a month before.

Passive fund flows are still on the rise

Despite outflows from equity funds overall, investors committed £1.3 billion of new capital to passive funds, focusing their selling on active ones.

Even in unloved UK equities, flows have been positive to passive funds over the past one, three and five years, with only occasional months of outflow, Calastone’s research shows.

Active UK equity funds have shed £51.8bn since January 2015, compared with £7.3 billion of inflows to passive ones, according to Calastone.

Glyn added: “Active funds are not just losing the fight for new capital, they are also losing their ability to hold onto their existing funds. In the last three years, a period of strong inflows to equity funds overall, active funds have seen outflows in eight out of every twelve months, compared to just one in every twelve for passive funds.

“The biggest advantage passive funds have over active ones is low cost. Squeezing cost out of the investment process is hugely value enhancing for investors.”