- A record £1.8 billion was withdrawn from UK equity funds by retail investors in May, according to Investment Association data released today
- New FCA listing rules are unlikely to reverse this trend
- Chancellor Rachel Reeves has not confirmed or denied whether the British ISA is going ahead
- Benchmarking and the rise of passive investing are at the root of UK fund woes
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“May was the worst month on record for UK equity fund flows, quite the accomplishment for a sector that has been in outflow for eight years. Since 2016, £54 billion has been withdrawn from UK equity funds by retail investors, according to Investment Association data. Even more troubling for UK asset managers is the fact the trend seems to be accelerating.
“The FCA has just issued a fresh set of reformed listing rules in a bid to encourage companies to launch on the UK stock exchange. Whether that works or not, it’s unlikely to have any impact on retail fund flows, which do not ebb and flow based on the number of companies listing in London. There are deep structural changes in the way retail investors buy funds which have led to the exodus from UK equities.
“The first is the rise of passive investing, with tracker funds seeing the lion’s share of inflows across the industry. Passive investing logically favours a global approach, and with the UK representing just 4% of the MSCI World Index, not much of the huge wall of money invested in trackers is benefiting UK stocks. Weak performance from active managers, stemming from the hegemony of a clutch of large technology stocks, combined with a focus on cost and simplicity, means the rise of passive investing almost certainly has father to run. Currently pretty much all net fund inflows from retail investors can be accounted for by tracker purchases, but passive funds still only account for £1 in every $ invested in funds by retail investors. Active managers may well yet lose more of their lunch to the passive machines.
“Another factor is the rise of global benchmarking. UK retail investors have historically been overweight UK equities relative to the global stock market, and in fact still are today, despite the enormous and relentless outflows we’ve seen in the last eight years. Many will be rebalancing their portfolio to better reflect the distribution of the global stock market, especially in light of the fact that the S&P 500 makes up around 70% of the world index and has performed a lot better than the Footsie.
“Advisers too will be following this global benchmarking trend. Many now outsource their decisions to multi-asset managers, discretionary fund managers or an investment committee. As an adviser you have to be pretty brave to buck the trend and take a big position in UK funds when the Footsie makes up such a small slice of the overall global stock market pie. If the UK continues to underperform, you’re going to hear about it from your clients, because they can now look up how the global stock market has performed in a matter of seconds online. So you’re probably going to toe the line of global benchmarks pretty closely, and if a new client turns up with an old portfolio dominated by UK equity funds, that means ditching them, and probably buying global funds or multi-asset funds.
“The funds industry will no doubt be hoping that the new government presses ahead with the British ISA, even though there are many reasons to believe that it won’t be hugely effective in generating the kind of flows in UK equities that are envisaged by some, not least because investors can simply swap out existing UK investments to take advantage of the extra £5,000 wrapper. Around 50% of the money AJ Bell customers currently invest through their stocks and shares ISAs is invested into UK assets, so requiring a certain amount goes into UK shares isn’t likely to spark a huge behavioural shift. Earlier this week, when asked whether the British ISA will see the light of day, the new chancellor Rachel Reeves declined to comment. It probably isn’t right at the top of her priorities, but sooner or later the industry needs an answer.”
