Record monthly outflow from UK equity funds
But the election result may be a catalyst for a turnaround, writes Sam Benstead.
12th July 2024 08:51
by Sam Benstead from interactive investor
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Investors pulled a monthly record of £1.8 billion from funds investing in UK shares in May, even as the FTSE All-Share rose around 2.5% for the month.
The data, from the Investment Association (IA), a trade body for the funds industry, showed that May continued a trend of outflows from UK equity funds, with £13.6 billion withdrawn in 2023, and £12 billion in 2022.
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This comes even as UK shares recover, with the FTSE All-Share adding 8% so far in 2024, including dividends.
Nevertheless, returns have been far weaker than in the US, where the S&P 500 is up 18% this year. Over 10 years, the S&P 500 has returned 335% compared with 81% for the FTSE All-Share.
UK shares are cheap relative to their profits compared with global peers. This has contributed to an uptick in takeover activity, as well as a rise in companies buying back their own shares.
However, UK-based investors are voting with their feet and moving money into better-performing global and US funds.
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The IA also found that in May inflows to index trackers remained strong with net retail sales of £2.1 billion. This included inflows of £1.2 billion into equity trackers and £815 million in bond trackers.
While equity funds saw an outflow overall, net sales into global equity were £434 million in May, making it the top-selling IA equity sector.
Short Term Money Market was the best-selling sector in May with net retail inflows of £696 million. The IA said this suggests investors may be taking a “wait and see” approach to deploy their capital later in the year once interest rates are cut and there is greater political certainty following elections. Money market funds yield about 5% by investing in short-term debt and overnight deposit instruments.
Miranda Seath, a director at the IA, said: “Our May data could be a sign that investor confidence is stabilising. While geopolitical uncertainty remains, much is set to be decided at the ballot box over the coming months, and investors will get used to a new political landscape.
“Looking forward, there are reasons to be positive as we expect interest cuts in the UK and potentially in the US later this year as inflation continues to fall. As outlook potentially improves, we will be keeping a close eye on how investors respond.”
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A turning point for UK equities could come following the election of the new Labour government, with a significant majority in Parliament.
Fund managers are optimistic that political stability will be good news for the economy and stock and bond markets.
This includes William Tamworth, co-manager of the Artemis UK Smaller Companies fund, who says that economic and political stability, together with an aspiration to strengthen relationships with Europe, could be an important step in rewriting the current negative narrative surrounding the UK.
“After years of outflows, a small change in sentiment could have a magnified impact on the share prices of listed smaller companies,” he said.
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