Money has been continually flowing out of UK equity funds for “much of the century”, according to fund selectors, who argue that despite ongoing negative sentiment towards the asset class, home market stocks still retain “some appeal”.
The comments come following data from Calastone, published yesterday (3 October), which found that outflows of £666m were seen from UK equity funds during the month of September alone, compared to net outflows of £564m across all equity funds over the period.
Elsewhere, and published on the same day, Investment Association data found that the IA UK All Companies sector suffered £629m in losses during the month of August, the largest outflow across all sectors. UK funds by region also dropped £829m.
Dewi John, head of research at Lipper, concedes that over July and August, Lipper’s Equity UK and Equity UK Income sectors were the two classifications with the largest outflows.
“That is often the case, and has been so for much of the century, accelerating over recent years,” he told Portfolio Adviser. “Indeed, it tends to be the case irrespective of performance: UK equity funds underperform, they sell off; they outperform… and still they sell off. This is likely the outcome of UK investors addressing their historical overweight to domestic equities, although where and when this strategic rebalancing ends is difficult to say.”
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Tom Green, fund analyst at FE Fundinfo, added that “despite economic data coming in more and more positive for the UK, and having our first rate cut, money continues to flow out of the asset class”.
Ryan Hughes, interim AJ Bells Investments managing director, agreed UK equities “have sat in the unloved camp for a number of years”. “The continued selling pressure highlights how UK investors remain overweight but without much sign of the disenchantment relenting.
“With UK equities now down to circa 3% of the global benchmark, it’s challenging for them to get air time with overseas investors while the gradual reduction in exposure from home investors creates a continual wave of selling pressure.”
Glimmer of hope
One “glimmer of hope”, according to Lipper’s John, is that investors seem less reticent to buy into passive investments within the UK equity market.
“[This is] almost exclusively [in] FTSE 250 trackers – where monthly flows have been consistently positive since November,” he explained. “That peaked in July, but a lower-rate environment should help mid-cap performance, and may therefore drive further flows.”
It isn’t just Lipper data showing this trend, either. FE Fundinfo’s Green said: “If you break the IA All Companies flows down into active versus passive funds,… passive outflows have now levelled off while active continues to suffer.
“We aren’t sure if this comes from people starting to reallocate to the UK through passives and ETFs or if marginal sellers of UK passive funds have dried up completely.
“The team and myself remain neutral-to-positive on the UK versus other asset classes, and hope that sentiment (and flows) can only really go up from here.”
AJ Bell Investments’ Hughes believes that, from a valuation perspective, UK equity funds “do look to have some appeal”. “With a P/E ratio that looks sensible, albeit a little higher than it was, those investors who are valuation-focused will see some appeal while the make-up of the index continues to provide diversification compared to other markets given its weighting towards older, less dynamic industries,” he reasoned.
“The negative rhetoric from the new Labour government won’t be helping with investors finding appeal for UK equities but I remain convinced they have a role to play in a diversified portfolio, however, we probably need to accept that this is highly likely to be at a lower allocation than has historically been seen.”
