UK equity fund outflows slow

UK savers are still opting for globally exposed equity funds as they seek improved returns in a challenging climate for UK funds, according to the latest data on investment fund flows.

Despite net outflows from UK equity funds slowing slightly in March they totalled around £835mn, according to the Investment Association (IA), a trade body. This followed a year in which savers pulled £12bn from UK-focused funds.

Outflows from UK funds in March were accompanied by £653mn in inflows for global funds, while IA data also showed that short-term money market funds experienced net retail sales of £667mn in the same period. The latter reversed a four-month trend of outflows, with inflows having previously spiked around the time of Kwasi Kwarteng’s “mini” Budget.

“Investors are looking for better returns than the UK market is delivering and has consistently delivered,” said Sam Benstead, deputy collectives editor at platform Interactive Investor. He said investors perceived the US as a convenient “one stop shop” for their money.

Benstead added: “The real difference is that the US has larger, better, more focused companies.”

Ongoing withdrawals reflect investors’ concerns about the British economy and shifts in the regulatory framework, as officials and industry leaders attempt to make the UK an attractive venue for investment.

The Financial Conduct Authority this week set out plans to simplify rules to entice companies to list in the UK. This included proposals to remove mandatory shareholder votes on acquisitions and to be more accommodating on dual class stocks — share classes which carry different voting rights.

Claire Madden, managing partner at Connection Capital, which advises private markets investors, said the UK was “just too uncertain” for investors. She said the two main political parties were unclear over the future of taxation and investors did not feel suitably incentivised to invest in UK businesses.

The FCA proposals are part of a debate about the competitiveness of UK capital markets, which this week prompted the chief executive of the London Stock exchange, Julia Hoggett, to call for “constructive discussion” on executive pay to make the UK a more attractive base for companies and highly paid chief executives.

Madden added: “Companies list in order to access the public capital markets, if there isn’t capital flowing into the market from investors, the whole thing is illiquid and the attraction is not there.”

UK-focused equity funds have experienced net outflows surpassing £1bn each month since the start of the year. This represented an acceleration in withdrawals compared with last year, though retail investors have withdrawn funds every year since the Brexit referendum in 2016.

Column chart of Net retail sales (£bn) showing Retail savers pulled record sums out of UK equity funds in 2022

However, UK investors did invest £4.1bn into other fund types, including fixed income and mixed asset, in the first quarter of the year as they sought to maximise tax-free wrappers ahead of a halving in the capital gains allowance to £6,000 from April 2023.

Separate and more recent data from Calastone, which captures both retail and professional investors, showed that April marked the 23rd consecutive month of net outflows from UK equity funds, totalling some £13.86bn since June 2021.

Calastone data showed that the bulk of £1.58bn in new investment was in global funds, though emerging market funds also experienced a boost as a result of a “weakening dollar and lower valuations relative to developed markets.

Edward Glyn, Calastone’s head of global markets, said investors were zoning in on North America, but he cautioned “company profits are under pressure and there remains a lot of uncertainty over the likelihood and severity of any potential economic downturn”.


Business Asia
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