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Two of the UK’s biggest star fund managers suffered £2.2bn in outflows last year after investors fled the underperforming funds in favour of cheap passive equity offerings and high-yielding cash products.
Terry Smith’s Fundsmith Equity Fund and Nick Train’s WS Lindsell Train UK Equity Fund were hit by redemptions every month in 2023, with annual net outflows totalling £1.4bn and £800mn, respectively, data from Fundsmith and Morningstar show.
The wave of redemptions reflects a tougher environment for active fund managers, who charge investors a fee in return for selecting a portfolio of stocks. Volatile markets have hampered the performance of the two funds, while investors have been lured by low-cost trackers and cash products offering the highest rates in a decade.
UK investors have pulled out of investment funds over the past two years, withdrawing £12bn in 2022 and £11.9bn in the 10 months to October 2023, according to the Investment Association. Brokers and analysts have blamed a combination of cost of living pressures, higher mortgage rates and the underperformance of UK equity markets compared with US equity and global fixed-income markets.
“The entire equity fund management sector saw large outflows in 2023 and it is impossible for us to avoid that trend,” Terry Smith, founder and chief executive of Fundsmith, told the Financial Times.
The Fundsmith Equity Fund has not outperformed the MSCI World index since 2020, returning 12.4 per cent last year compared with the index’s 16.8 per cent. Fundsmith’s assets under management dropped from £28.9bn at the end of December 2021 to £23.7bn two years later.
However, the fund has beaten the MSCI World index on an annualised basis since its inception in 2010, returning 15.3 per cent compared with the index’s 11.5 per cent. Smith’s style is to invest in a small number of “high quality, resilient, global growth companies”, primarily in the US, that he aims to hold for the long term.
“We have made it clear from the outset that we do not expect our strategy, or indeed any strategy, to outperform the market or even make a positive return in all reporting periods and market conditions,” Smith said. “We think that investors should judge our returns over the long term.”
Train’s £3.9bn WS Lindsell Train UK Equity fund, which was launched in 2006, invests mainly in UK equities, which have performed poorly in recent years. A combination of outflows and investment losses drove the fund’s assets under management down £1.8bn between January 2022 and November last year.
The fund, which has underperformed the FTSE All-Share index over the five years to November 2023, has not attracted net inflows since December 2020. Over 10 years, Train has returned 7.6 per cent on an annualised basis, compared with the benchmark’s 5.1 per cent. Lindsell Train declined to comment.
