Kyle Caldwell reports on the latest fund data, which shows that UK investors are still shunning their own domestic market.
UK equity funds remain unloved by investors, with the latest figures from the Investment Association (IA) showing that £1.6 billion was withdrawn in February, the highest amount since January 2022. This brings the number of consecutive months of outflows to 21.
This is despite the UK stock market being widely viewed as offering considerable opportunities at present, particularly compared to US stocks. In addition, the average dividend yield for the UK market is among the highest in the world.
The UK market has been out of favour since the UK voted to leave the European Union in June 2016. At the time, uncertainty over how Brexit would pan out unnerved investors.
Today, investor sentiment is being negatively impacted by high inflation, rising interest rates, and stagnant economic growth.
However, the trend of UK equities becoming less popular extends beyond the Brexit vote. Over the past two decades, pension funds have been selling down exposure to UK shares. Defined benefit pension schemes held more than 50% in UK shares in the 1990s, but now own less than 2%. This shift was made to make the pension schemes more diversified, increasing exposure to global shares, as well as bonds and alternative assets, such as private equity and infrastructure.
While this has been a headwind for demand for UK equity funds, the flip side is that international investors have increased their stakes. Nick Train, manager of LF Lindsell Train UK Equity, says that this is “by no means a bad thing”. He adds: “Perhaps smart global investors can help UK companies pursue growth strategies better than liability-haunted UK pension funds.”
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For interactive investor customers, the UK is more in vogue. Of the top 10 most-bought investment trusts in March, four are UK-focused: City of London (LSE:CTY), Merchants Trust (LSE:MRCH), Greencoat UK Wind (LSE:UKW), and Law Debenture Corporation (LSE:LWDB), while there was just one UK fund, Fidelity Index UK, among the top 10 most-bought funds.
The latest fund statistics show that bond funds are continuing to prove popular. Income-seeking investors are moving to take advantage of bond yields being at their most attractive levels in years owing to rising interest rates. A total of £1.1 billion was invested in February, cooling from £1.6 billion in January.
Three of the five bestselling fund sectors are bonds: corporate bond, mixed bond, and global inflation-linked bond, which attracted sales of £279 million, £232 million and £170 million.
However, topping the sector charts was US funds, which pulled in £454 million. This comes against a backdrop of share price re-ratings for some of the biggest US tech stocks in the first quarter. Year-to-date, the five FAANG stocks have made very strong starts to the year. Leading the way (as at 6 April) is Meta Platforms (NASDAQ:META), up 69.5%, followed by gains of 30.9%, 17.8%, 17.2% and 16.1% for Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) and Netflix (NASDAQ:NFLX).
Completing the top five bestselling sectors in February is global equity income, which had sales of £168 million.
Overall, investors put £409 million into funds in February, down from £1.4 billion in January.
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