- 2023 looks like it will be the worst year on record for UK equity fund outflows, data from the Investment Association is expected to show when published
- There have been over £24 billion of retail outflows from UK equity funds in the last two years
- Factors behind the outflows include the cost of living crisis, higher interest rates and weak performance
- The exodus may well continue as investors unwind their home bias
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“UK equity funds have been haemorrhaging money since 2016, and this trend only seems to be accelerating in recent years. 2023 looks like it is going to be the worst year on record for UK equity fund flows, based on data provided by the Investment Association up to the end of November. Figures for December are still yet to be published, but an £815 million net inflow into UK Equity funds will be required for 2023 not to claim the crown for being the worst year on record. On current trends, that seems unlikely.
Source: Investment Association and AJ Bell.
“In 2023 to November, a net £12.8 billion was withdrawn from UK equity funds by retail investors. To put that in context, in 2008, in the depths of the financial crisis when the UK banking sector was in meltdown, £1.6 billion was withdrawn from UK equity funds. In 2016, when investors took fright because of the EU referendum, £4.9 billion was withdrawn. And in 2022, as the cost of living crisis took hold, £12 billion was withdrawn from UK equity funds, against an unprecedented backdrop of over £25 billion being withdrawn from funds across the board in that year.
“If domestic fund investors won’t invest in UK funds, it’s little wonder the UK stock market is struggling, and so many UK companies are seeking to list overseas. Over eight years of pain, more than £46 billion has been withdrawn from UK Equity funds by retail investors, with £24.7 billion whipped out in the last two years alone. Given the relentless nature and scale of the outflows it’s quite legitimate to ask what exactly is going on. There are a number of factors which explain the exodus from UK funds.”
- Cost of living crisis
“When people are paying sky high prices for food, energy and transport, disposable income gets squeezed and they don’t have the ability to invest in funds. We saw this very clearly in 2022 when over £25 billion was withdrawn from funds across the board, with £12 billion of that coming from UK equity funds. However, outflows from UK equity funds pre-date inflationary pressures, and they have been hit a lot harder than other regional equity funds, so this is only a small part of the story.”
- Higher interest rates
“Likewise, higher interest rates on cash have provided a bigger competitor to investment funds in the last few years. It’s possible this goes some way to explaining why UK funds have been suffering such big outflows. As a market with a high dividend yield, it’s favoured by UK income-seekers who might have been tempted away by the allures of cash.”
- Performance
“UK equities have been a laggard on the global stage for some time now, with the notable exception of 2022, when they performed much better than the global stock market because of the US tech sell-off (see chart below). But on the whole, investors looking at their annual statements over the last decade would have seen high levels of growth from their global funds compared to their UK holdings. Little wonder many of them have jumped ship.”
Source: FE total return in GBP to 29 January 2024, chart shows the margin by which the FTSE All Share underperformed or outperformed the MSCI World Index (a measure of global stock market performance).
- Fund launches
“The UK has become a bit of an elephant’s graveyard for fund launches, and has been overtaken by global and US funds in recent years. In the last five years there have been 23 UK fund launches, compared with 42 US fund launches and 159 global fund launches. If fund providers aren’t out there selling UK funds, and are instead marketing global and US funds, then the writing is somewhat on the wall for fund flows. There is something of the chicken and the egg about this situation. Fund providers will tend to launch funds where they think there will be demand, which generally means in areas where performance has been strong, and the UK scores poorly on both these counts.”
Source: Morningstar, doesn’t include funds which have ceased trading.
- Unwinding of home bias
“Believe it or not, UK equity funds were once the flagship product for almost all fund groups, and the first port of call for investors looking to pump money into the market. UK fund managers like Anthony Bolton, Richard Buxton, Bill Mott, and of course Neil Woodford, dominated headlines and fund flows. The apex predators of the star manager culture of the nineties and noughties were predominantly found hunting for opportunities on the London Stock Exchange.
“To understate the obvious, a number of things have happened since then. Star managers have given way to investment strategies led by philosophy and process. Active funds have been outsold by index trackers. Multi-asset funds have become more global in their thinking. And an often laissez-faire attitude to regional equity allocations by fund managers, advisers and investors has developed into a much more benchmark-aware approach to managing money.
Source: Investment Association and AJ Bell.
“As a result of professional and private investors unwinding their home bias, UK equity funds have lost their dominance. UK equity funds accounted for 51% of all equity fund assets in the Investment Association universe in 2009, alongside other regional and global equity funds. That has now shrunk to 27%. Clearly a large part of that shift can be attributed to weak UK performance relative to other areas, but fund flows have also been a factor, as investors seek out overseas opportunities and also realign their portfolios to take less regional risk by carrying such a large home bias.
“This unwinding of home bias can also be seen amongst multi-asset funds. At the beginning of 2009, the average balanced fund held 55% of its equity holdings in the UK, and that has now fallen to 25%. By contrast, the US equity allocation has risen from 12% to 39%. Over the same period, the UK stock market’s presence in the MSCI World Index has dwindled from around 10% to 4%. So the shift in multi-asset funds partly echoes changes in the global stock market, but it also reflects greater adherence to global benchmarks, and a growing reluctance to carry such a heavy domestic bias.
Source: Morningstar and AJ Bell, allocation of the IA Mixed 40 to 85% Equities sector.
“Taken to its logical conclusion, a market-based regional allocation to equities would roughly mirror the MSCI World Index, which would imply just 4% of equity funds invested in the UK, much lower than the current 27% held by retail investors. In other words, despite recent outflows and weak UK stock performance, fund investors are still heavily overweight their home market when compared to the global stock market. If they continue to unwind this home bias, there may be more outflows from UK Equity funds to come.”
