The start of the financial year has proven challenging for Australian managed funds, with inflows hitting a five-year low, according to the latest Fund Flow Index from Calastone.
Equity funds recorded a paltry A$705 million in Q3 inflows, a staggering 81% decline year-on-year.
Meanwhile, domestic equities attracted A$306 million, while overseas-focused funds witnessed an outflow of A$77 million.
Marsha Lee, Director, Australia and New Zealand at Calastone, indicated that market volatility and changing bond yields are major factors affecting equity valuations.
"The stock market in Australia and around the world duly fell in August and September, turning what was already a lacklustre start to the financial year into a distinctly soggy one," said Lee.
Global market turmoil drives weakest start to financial year in five years for managed fund flows: @CalastoneLtd #australianfintech #fintech #fintechnews #finance #technology https://t.co/WHyQrNQFaj— Australian FinTech (@austfintech) October 10, 2023
Sector-wise performance
Infrastructure funds were the silver lining, luring in A$470 million in Q3.
Fixed income funds initially saw a robust inflow but tapered off by September due to declining bond markets.
Property funds experienced their worst quarter, with outflows amounting to A$199 million.
Mixed asset funds lost investor interest, shedding A$288 million in the quarter.
Lee added, "Infrastructure tends to do better than general equities in periods of low growth and high inflation. This reflects long-term contracts, while many projects also have inflation protection built into their pricing."
Underlying trends
Despite a strong start, fixed income funds witnessed dwindling interest as investors reconsidered the potential for capital gains, Marsha Lee noted.
"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 Reserve Bank of Australia, are suggesting that the time has not yet come."
Property funds continue to grapple with an adverse interest rate environment, leading to investor hesitance.
"Higher rates are hitting cash flows in the sector as well as asset valuations, while a slowing economy is bad for tenant demand," said Lee.
Investor sentiment
Mixed asset funds, designed to provide a balance between equities and bonds, have been hard hit, marking their fourth consecutive quarterly outflow.
Lee explained, "Bond and equity markets have moved largely in tandem in the last eighteen months, leading investors to question whether they can do better elsewhere for a similar risk profile."
The sombre mood among investors seems set to influence market dynamics for the remainder of the financial year.