April saw an increase in fund flows, but did investors sell in May?

The ISA season caused the largest inflows into investment funds in April, but May may have seen a shift in sentiment

Industry data indicates that while investors poured into equity funds in April during the ISA rush at the end of the tax year, they were less active in May.

Usually, April is a busy month for fund inflows as investors try to spend down their ISA balance.

This is reflected in Investment Association (IA) data, which shows that UK retail investors invested a net £1.11 billion in funds in Aprilthe largest inflows of the year thus far.

Separate data from Calastone, a data provider, indicates that UK investors reduced their purchases of equity funds in May.

Fund inflows decreased to 525 million, according to the provider's data.

It may have happened as a result of growing inflation, geopolitical unrest, and persistent worries about Trump's trade tariffs.

It's possible that some even adhered to the investment maxim "sell in May, go away, don't come back until St. Legers Day."

"The Trump administration's retreat from its extreme stances on tariffs resulted in significant gains for global markets in May," stated Edward Glyn, head of global markets at Calastone. Investors were not very confident when they bought into the rally.

Investor caution makes sense given the high level of uncertainty surrounding inflation, interest rates, trade wars, and geopolitics. Investors are undoubtedly choosing carefully where to allocate their funds.

We examine where capital is being invested.

Investors become picky about equity funds.

Investors who were willing to take on greater risk with equity funds were active in April.

With inflows of 948 million, North American stocks accounted for the majority of the month's 962 million net retail sales into equity funds, according to the IA.

In a second month of inflows, the IA reports that European equities saw 106 million investor dollars, while globally diversified equity funds saw 872 million.

The IA reported that while outflows from UK equity funds continued to total 817 million, they slowed somewhat from 1.2 billion in March.

Investor behavior is starting to divide into two groups, according to Miranda Seath, the IA's director of market insight. North American stocks are where risk-taking investors are placing their money. More cautious investors, meanwhile, are shifting their money into lower-risk instruments like money market funds and favoring diversification away from US stocks and toward European stocks.

"As long as economic uncertainty persists and tariff policy is subject to change, the future of international markets will be uncertain. Central banks may put off lowering interest rates if tariff threats do cause prices to rise. Such a situation might indicate ongoing market volatility.

However, the sentiment of the market seems to have shifted in May.

Amid worries over President Trump's trade policy, Calastones data shows that inflows to US stocks fell to 115 million, their second-worst month since September 2023.

According to Calastone's data, investors increased their holdings by a net 369 million, making European stocks their best month since June 2024.

Nonetheless, Calastone reported 546 million in global fund inflows, which it claimed was about one-third of their three-year monthly average.

Calastone reported that for the second consecutive month, outflows from UK-focused equity funds decreased to 449 million, which is just over half of the average monthly outflow over the previous three years.

"The UK stock market is flirting with the all-time high it reached in February this year," Glyn continued. Some potential sellers appear to be comforted by the possibility that the long-awaited re-rating is finally happening, even though this recovery hasn't been sufficient to encourage new buyers to reevaluate the outlook for UK stocks.

"The consistent withdrawals from funds with a UK focus in recent years were a blatant surrender of expectations for UK stocks.

Although it's too soon to declare this trend to be over, a less derogatory narrative is an essential first step.

Will bonds see an increase?

According to IAs April data, bond funds saw significant withdrawals of £1.08 billion in April, including record outflows of 177 million from high-yield funds.

However, Calastone's more recent May data indicates that for the first time since February, fixed income funds saw inflows last month. Calastone stated that investors increased their holdings by 328 million.

The largest gain was in sovereign bond funds, where investors contributed 182 million in May.

As worries about inflation and government solvency took their toll, bond yields rose sharply in May, which suppressed bond prices, Glyn continued. However, they obviously reached levels that were alluring enough to encourage investors to lock up fresh capital in high yields.