UK investors withdrew £733m out of UK equity funds in March, marking the 22nd consecutive month of outflows for the asset class, according to Calastone.
However, this is below the average monthly outflow of £888m from the sector for the period between November 2022 and February 2023. In total, UK equities have suffered outflows of £12.1bn since December 2020.
The FTSE 100 was one of the rare major indices to achieve a positive return last year but the performance of UK equities since the start of the bear market has not improved sentiment for the sector.
Edward Glyn, head of global markets at Calastone, said that the outflows from UK equity funds may seem “surprising”.
He added: “The large share of UK-focused funds in investor portfolios makes them an obvious source of cash for those keen to reduce overall equity exposure, while the increasing perception of the London stock market as an investment backwater along with the political and economic difficulties the country has been facing keep the pressure on to rebalance holdings away from UK shares.
“A period of strong performance by UK equities, after years missing out on the global bull market has clearly provided an opportunity to cash out.”
Nick Train, portfolio manager of the Finsbury Growth & Income trust, recently called the UK a “backwater of global equities market”, lamenting the absence of a “globally significant technology champion”.
Train also pointed out that the “generosity” of UK corporations with dividends is, in some instances, detrimental to the “building of long-term business value”.
Things could get worse for the UK market, as Simon Gergel, manager of the Merchants Trust, warned that further UK large names are mulling over leaving for the US market to get a higher valuation.
Although not withdrawals, one group to struggle in March was environmental, social and governance (ESG) portfolios. They experienced their second-worst month since October 2019, taking in £83m, almost 90% less than their monthly average over the past three years according to Calastone.
Since 2015, investors have poured £23.9bn into ESG funds. This is more than half of all equity inflows over the past eight years.
Cumulative ESG and cumulative non-ESG inflows since 2015
Source: Calastone
Glyn said that the “ESG gold rush” might have passed its peak but that the asset class remains a good long-term investment.
He said: “A host of factors are at play, including the high weighting of poorly performing technology stocks in ESG portfolios, the greenwashing backlash and a refocusing of marketing activity by fund managers.
“ESG may be down, but it’s not out. Now the initial flurry has subsided, the asset class is likely to mature over the longer term.”
Fixed income funds slowed down in March as a result of the improved sentiment toward equities, but investors still added £581m into the asset class, which remains above average.
Calastone said that the recent inflows into fixed income funds reflect hopes of capital gains if policy rates are near their peak and market interest rates fall further.
Over the whole of the first quarter, £2.7bn flowed into fixed income funds, making it the best quarter on Calastone’s record.
On the equity side, UK investors displayed a strong preference for the global sector in March, with £1.48bn of inflows into this sector last month.
Global funds became the largest category of funds under management in the UK in December 2020, overtaking UK equities. Calastone’s figures show net inflows of £22.7bn to the global sector over the last two years.
Cumulative net flows of Global equity and UK equity
Source: Calastone
Index trackers were also one of the major beneficiaries of the improved confidence in equities in March. Investors added £885m to passive equity funds, the best month for index-trackers since April 2021 and their first month of inflows in more than a year. Investors, however, withdrew £15m from active funds.
Glyn said: “Trackers bore the brunt of the big asset allocation switch out of equities in the bear market, in the expectation that active fund managers can position funds defensively, while trackers just ride the market.
“Hopes, perhaps premature, that the worst is now behind us, caused a partial reversal of that pattern in March.”