The Q3 investor trends: Calastone

Property funds have seen record quarterly outflows in the third quarter of 2023 while investors have demonstrated a bias to Australian equities.

According to Calastone’s latest managed fund flow data, real estate managed funds saw outflows of $199 million, the third consecutive quarter to see outflows. 

Marsha Lee, Calastone director, said: “Commercial property values were very hard hit in the second half of 2022, both in Australia and internationally as the market adjusted to the sharply higher interest rate environment.

“In 2023, values have seen much more modest declines, but investors seem in no mood to dip their toes back in. Property tends to have lots of borrowing so higher rates are hitting cash flows in the sector as well as asset valuations, while a slowing economy is bad for tenant demand.”

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Mixed asset funds also saw outflows of $288 million, its fourth consecutive quarter of outflows, which brought total outflows to the last 12 months to $947 million. 

Calastone highlighted that between 2019 and 2021, only one month had seen outflows from mixed assets funds but there had been six months of net selling since the beginning of 2023.

Lee said: “Mixed asset funds were created to benefit from the way equities and bonds have traditionally moved – when one goes up, the other had tended to go down. This meant you could achieve a better return for a chosen level of risk. 

“The trouble is that bond and equity markets have moved largely in tandem in the last 18 months or so which is leading investors to question whether they can do better elsewhere for a similar risk profile. This reappraisal is clearly driving investors out the doors. Mixed asset funds used to enjoy steady inflows month in, month out, as investors had them cemented into savings plans, but this no longer seems to be the case.”

Exploring which sectors saw inflows during the three months, fixed income funds saw inflows of $2 billion, infrastructure funds gained $470 million and managed equity funds saw inflows of $705 million.

Calastone said most equity sentiment was towards domestic equities with a little under half of inflows going into Australian equity funds, although overall equity inflows were the weakest third quarter in five years with inflows down 81 per cent year-on-year.

All of the buying was concentrated in July as the stock market rallied while selling began in August. 

In the fixed income space, there was a sharp inflow of capital to bond funds in July and August but modest outflows in September, which led to the $2 billion inflows in the Q3 being the highest since the final quarter of 2021.

“Bond investors are juggling the attraction of locking into high yields now with the apparently receding prospect of capital gains in the short term. Momentum is against them for now. Clear signs of sustained disinflation accompanied by a definitive turn in the rate cycle are top of the wish list for market bulls at present, but central bankers, including at the RBA, are suggesting that the time has not yet come,” the Calastone director stated.