UK equity funds are on track to post their worst-ever year of outflows, with the total yanked out by investors rising to £80bn since the Brexit vote in June 2016.
Data from Morningstar shows UK equity funds bled £26.2bn between January and October this year, up from £20.5bn for the same period in 2022.
The amount pulled from UK equity funds so far in 2023 has already surpassed the £25bn of net outflows recorded in 2022, according to Morningstar. Over the past three years, UK equity funds have posted only two months of positive flows.
“Outflows from UK equities have pretty much been a constant for nearly a decade. Even after a strong year in 2022 relative to global equities, any sustained interest is yet to surface,” said Jack Fletcher-Price, associate analyst at Morningstar.
“A lot of UK large-cap listed businesses are more global in nature, which may dispel the notion that outflows from UK equities are a vote of no-confidence in the UK as an economy. But while valuations might appear attractive there needs to be a change in sentiment for the tide to turn on investors allocating to UK equities.”
UK equity funds remain out of favour with investors, with political upheaval, the Covid pandemic, rising interest rates and inflation among headwinds that have plagued the sector.
Pension funds have also retreated from domestic companies, with their average allocation now about 6%, down from approximately 53% 25 years ago.
“The UK market has being trying to run up a down escalator in terms of fund outflows,” said David Stevenson, a fund manager at Amati Global Investors.
“It makes it a difficult environment for good companies to get good valuations and proper attention.”
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Several attempts have been made to revive interest in the UK, and the government has also unveiled measures to stem the exodus of domestic companies listing in rival financial centres.
The Chancellor, Jeremy Hunt, announced in his July Mansion House speech proposals to enable defined benefit schemes to merge. The aim is to enable them to build scale and make riskier investment calls.
He also revealed that some of the UK’s largest defined contribution pension schemes had agreed to allocate 5% of the assets in their default funds to unlisted equities by 2030. Currently, they allocate less than 1%.
“There is no silver bullet to this,” said Stevenson, adding that investor sentiment had turned more positive following better-than-expected data in October showing that UK inflation had fallen to 4.6%.
Grabbing the bull by the horns
However, he said this alone was not enough to reverse years of persistent outflows.
“It needs some form of policy intervention. But within those policy initiatives, no one thing will do it,” he said.
“We need net buyers. There are plenty of cheap companies. We need to increase demand for those.”
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Last month, a host of senior fund management executives, including Liontrust chief executive John Ions, Octopus Investments CEO Benjamin Davis, and Premier Miton boss Mike O’Shea called on the Chancellor to reform the UK’s ISA framework to tackle a “downward spiral of investment and lower valuations”.
In a letter published in The Times on 15 November, the group urged Hunt to introduce a British ISA to allow investors to put their £20,000 annual allowance to work in “growing the economy and supporting British companies”.
“It’s not rocket science. Just give people a good reason to own UK companies and they will,” said Stevenson.
Others are more optimistic about the future outlook for funds investing in UK companies.
Michael Browne, chief investment officer at Martin Currie, the specialist investment manager of Franklin Templeton, said the tailwinds from some policy initiatives rolled out to breathe life into the UK market could be “significant”.
“The outlook for the UK economy in 2024 is exciting,” he said, adding that UK equity valuations relative to other geographies are near “all-time lows”.
“Therefore, as macroeconomic conditions improve, the opportunity for attractive future returns is arguably at its greatest.”
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