Investors dump funds: here’s what they are selling

For the second month on the spin fund investors have heavily sold funds. We take a look at the types of funds proving the least popular. 

Investors stepped up their selling of funds in February in response to rising levels of inflation, higher interest rates and economic uncertainty following Russia’s invasion of Ukraine.  

It was the second consecutive month that more money was withdrawn than invested. However, in February it was notable that the pace of selling had accelerated, with £2.5 billion withdrawn versus £1.2 billion in January.

Bond funds accounted for most of the outflows, with £2.4 billion withdrawn from fixed income strategies. Investors have shunned bonds due to increases in the cost of living, with the latest Consumer Prices Index showing that UK inflation is rising at its fastest rate in 30 years and reached 6.2% in February.

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Inflation is a bond's worst enemy, as it erodes the purchasing power of the income that investors are paid.

In short, inflation makes the repayments received from bonds less valuable. When inflation is high, holders of long-dated bonds suffer the most as this part of the market is the most sensitive to interest rate changes. As a result, longer-dated bond prices fall more heavily than bonds with a short lifespan, that is those that are a couple of years away from maturity.  

In February, all bond sectors saw outflows, with Mixed Bond and Strategic Bond proving the most unpopular, losing a respective £319 million and £309 million. 

Overall, however, it was an equity fund sector that saw the biggest outflow, with £503 million withdrawn from the UK All Companies sector. UK Equity Income and UK Smaller Companies were also out favour, with £285 million and £201 million exiting the sectors.

The UK market has been out of favour with fund investors since the UK voted to leave the European Union in June 2016. At the time, investors were unnerved about how Brexit would pan out and then along came the Covid-19 pandemic, which impacted investor sentiment.  

Both headwinds have now eased, yet investors continue to give UK shares the cold shoulder, leaving various fund managers perplexed. Nick Train, for example, manager of the Finsbury Growth & Income (LSE:FGT) investment trust recently told interactive investor’s head of markets Richard Hunter in a recent interview that “the UK market has been unfairly neglected in recent years”, and UK companies are “undervalued relative to their global peers”.

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Most other equity regions posted outflows. The two exceptions were US and global strategies, which attracted £588 million and £322 million.

Passive funds bucked the wider trend. A total of £1.3 billion was invested during the month. At the end of February, passive funds had £289 billion under management, which represents 19.3% of overall fund assets.