Passive dominated investment flows in the UK in Q2 2023

Investment Flows in the UK: “Active Funds Getting No Money”

Citywire reports on Q2 investment flows in the United Kingdom and the news is unsurprising. Investment advisors flocked to passive funds while there was virtually zero interest in actively managed funds, demonstrating that the passive investing craze is worldwide and not just a U.S. phenomenon.

However, compared to prior years, overall cash inflows into funds was down sharply, likely due to the weakening global economy. According to the UK platforms surveyed, Novia, Nucleus, M&G Wealth, Embark (Advance and Scottish Widows platforms), Abrdn (Elevate and Wrap), Quilter and AJ Bell, their flows were down 48% in Q2 compared to every quarter since 2010.

Chief investment officer at Embark, Peter Toogood, said, ‘The general trend we’re seeing is that active funds are getting no money,” he said. “Six or seven months in [to 2023]… there’s a little bit sometimes in bond funds, but the main retail money flow? Not a lot”

Analysts have remarked that the returns of passive indexes are very top-heavy, with the largest firms like Apple, Microsoft, Amazon, Nvidia, Alphabet (Google), Tesla, and Meta (Facebook) driving a large portion of the gains.

Here at Passive Parabellum, we track investment flows closely because they are the main determinant of stock prices as company fundamentals matter little in a passive-dominated market.

Passive investment flows play a significant role in influencing stock prices by reshaping the dynamics of the financial markets. When investors allocate their capital to passive investment vehicles like exchange-traded funds (ETFs) or index funds, these funds typically replicate the performance of a particular index, such as the S&P 500. As more capital flows into these passive instruments, they must purchase the underlying securities in the index they track. This increased demand exerts upward pressure on the prices of those stocks, particularly for larger and more heavily weighted constituents. In the same way, stocks excluded from the index or underweighted tend to experience selling pressure.

The end result is that passive investing promotes a self-reinforcing cycle where higher stock prices attract more passive investments, further propelling the market’s gains. Consequently, passive investment flows have become a critical driver of stock market trends, influencing not only individual stock prices but also overall market valuations and volatility.

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