Record £25.7 billion pulled from funds last year

Crashing stock and bond markets sparked the first-ever year of fund withdrawals.

A record amount of money was taken out of investment funds last year as rising interest rates and inflation spooked markets, leading to one of the worst-ever years for returns.

Data from the Investment Association (IA), a trade body for the funds industry, showed that £25.7 billion was withdrawn in 2022. This was the first-ever annual outflow of money, with the next worse year coming in 2008 when only £4.2 billion was added to funds. 

In 2022, the classic 60/40 stocks to bonds portfolio lost 17% in dollar terms, according to fund manager BlackRock, with global equities down 18% and global fixed income down 15.7%.

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Returns in sterling terms were better owing to a weak pound, with Vanguard LifeStrategy 60% Equity fund losing 9%.

Morningstar, the data firm, found that it was the worst year for the 60/40 portfolio since 2008.

Poor returns across stocks and bonds were caused by steep and unexpected interest rate rises to fight inflation caused by a reopening of the global economy following the pandemic. Expensive stocks, such as the big tech firms that dominate global and US indices, were hit the hardest, as were bonds with long maturity dates.  

UK shares bucked the trend, however, with the FTSE All-Share ending the year flat, including dividends.

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Sustainable funds bucked the trend, with £5.4 billion inflows throughout the year. Tracker funds also proved popular, with yearly inflows of £11 billion as investors dropped expensive, but often underperforming, active managers for cheap alternatives.

Tracker funds under management stood at £284 billion at the end of December. Their overall share of industry funds under management was 20.7%.

UK investors took £282 million out of funds in December 2022, in the 10th month of net retail outflows in 2022. Money market funds saw outflows of £721 million, while mixed-asset funds saw outflows of £116 million.

North America was the best-selling IA sector for the second month in a row, seeing inflows of £358 million.

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Chris Cummings, chief executive of the IA, said: “UK retail investors faced a challenging year in 2022, as inflation soared following the Russian invasion of Ukraine, which caused energy and supply shocks. Investors grappled with a cost-of-living crisis and returns from stocks and bonds falling in tandem.

“Funds saw outflows in 10 months out of 12 last year, with £25.7 billion withdrawn through the year, a record annual outflow. As the December data shows, the significant outflows we saw earlier in the year are easing. With markets rebounding at the start of 2023 and the outlook for bond investing improving, there are glimmers of hope that investor confidence will increase in the first quarter of 2023.”