Record investor exodus from UK funds

UK retail investors continue to give their home market the cold shoulder. Hannah Smith explains why. 

UK equity funds suffered the worst-ever three months of investor withdrawals between June and August as the Covid-19 pandemic and Brexit uncertainty caused investors to turn their backs on British assets.

That’s according to data from the Fund Flow Index run by global funds network Calastone, which shows a net £1.2 billion flooded out of UK-focused equity funds over the three months in the worst showing its index has ever recorded. The outflows over the period even dwarf those seen in the aftermath of the UK referendum on EU membership.

This is down to investors “punishing” UK funds in the face of a potential no-deal Brexit, and the government’s handling of the Covid-19 crisis, which has seen the UK sink to the bottom of the Organisation for Economic Co-operation and Development (OECD) economic league for its performance during lockdown. Investors have also had to contend with the triple whammy of dividend suspensions and cuts, negative interest rates and a tough environment for the value stocks that comprise a large portion of the UK market.

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Active funds have been especially hard hit by the trend, with half the outflows from active funds in the last three months attributable to UK equity funds alone.

European equity funds bounce back

In contrast, all non-UK equity funds posted unusually strong inflows over the same period. European equity funds, for example, saw their first inflows in two years as investors sought cheap shares without the risks associated with the UK market. August saw £170 million of net inflows, the first time investors have added new capital to European funds since September 2019.

Non-UK equity funds enjoyed their second best three-month period in almost two years between June and August as investors poured £1.6 billion into these portfolios.

“Not content with the economic storm caused by the pandemic, the prospect of a no-deal Brexit is once again clouding the outlook for the UK too,” says Edward Glyn, head of global markets at Calastone. “This is prompting investors to dump their UK holdings and switch to markets showing greater Covid-19 resilience and that don’t face Britain’s bespoke Brexit risks.

“On the face of it, the inflow to European funds seems strange given rising infection rates, but European equities are relatively cheap compared to their record-priced US counterparts, and the dollar is in decline.

“Funds focused on US equities had one of their worst months in the last year in August, so investors may be switching focus as a hedge against the political, social and economic upheaval in the US, although we will need to see several more months of solid inflows to Europe before we can be sure this is a new trend. Low valuation alone is not enough to tempt investors, as unloved UK equity funds can testify.”

Calastone calculates its flows data by analysing more than a million buy and sell orders every month, tracking investment fund orders from financial advisers, platforms and institutions. The firm says that more than two-thirds of UK fund flows by value pass across its network each month.