Investors ignore strong returns and dump British stocks for US rivals

A bear market in American shares did nothing to deter UK investors from choosing growth over value.

British investors shunned domestic shares in May, instead preferring high-growth stocks listed on the other side of the Atlantic.

The Investment Association (IA), the trade body for the funds industry, found that North America was the best-selling equity fund region in May 2022, with net flows of £441 million.

Meanwhile, all other equity regions experienced outflows, including £1.2 billion from UK funds, £134 million from global strategies and £714 million from Europe funds. Equity funds overall saw £1.2 billion of outflows in May.

The US is the home of the most powerful companies on the planet, including tech juggernauts Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) (Google). Its market is more expensive than the UK’s relative to profits, but its companies are growing faster. This year the S&P 500 index of America’s largest firms has dropped 18.5% (in dollar terms), while the FTSE All-Share has fallen 7.5%.  

However, over the past decade American stocks come out on top. Including dividends, the S&P 500 has returned 328% and the FTSE All-Share has returned 92%. 

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The worst-selling IA sector in May was sterling corporate bonds, which experienced outflows of £1.8 billion.

Investors have been dumping bonds due to rising inflation and interest rates. Their fixed income becomes less valuable in the face of rising prices and higher rates decreases the appeal of existing but lower-yielding bonds.

The IA also reported that mixed-asset funds was the best-selling asset class in May, with £653 million in net retail sales. “Other” funds, which includes the Targeted Absolute Return, Volatility Managed, and Unclassified sectors, was the second best-selling asset class, with £344 million of inflows.

Sustainable and passive boom continues

Amid net outflows from stock market funds, two important trends showed no signs of slowing down.

The first is the rise of environmental, social and governance (ESG) investing. Responsible investment funds saw a net retail inflow of £1.2 billion in May, sending responsible investment funds under management to £86 billion. Their overall share of industry funds under management is now 5.9%, according to the IA.  

Interactive investor’s ACE 40 list of top sustainable investments includes UK, global and “alternative” fund ideas, among others. 

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The second theme is the growing important of passive investing, where funds own an entire stock market or investment sector.

Tracker funds saw a net retail inflow of £877 million in May, putting assets under management at £290 billion in Britain. Their overall share of industry funds under management is just below 20%. We recommend a number of passive funds on our Super 60 list on portfolio ideas.