Inflows return but UK still out of favour

UK companies were shunned by investors once again in January despite data from the Investment Association revealing inflows of £1.4bn for the month, a far more encouraging figure than December’s outflow of £281m.

The FTSE 100 hit record highs in February, but there was little evidence of confidence in the UK All Companies sector as a whole in January. Investment Association CEO Chris Cummings (pictured) said that the negative news cycle on the health of the UK economy may be impacting investor sentiment, and the sector suffered the highest outflows for the third month in a row, at £1.3bn, up from December’s £1bn.

This fuelled outflows in the broader equities space, where funds saw investors pull £913m, up from £355m in December. European equity outflows softened to £155m, their best month since February 2022, while the North America and Asia regions both attracted £363m and £133m, respectively.

The real success story of the month was fixed income, where investors pumped net £1.6bn as yields became more attractive. This was more than triple the money invested in December 2022, and fixed income made up four of the five best-selling sectors.

Top IA sectors by net retail sales, January 2023

Sam Benstead, bonds specialist at Interactive Investor, said the money moving into gilt and corporate bond funds demonstrated that investors were searching for steady income amid economic uncertainty.

Benstead added: “Bonds are finally offering a genuine alternative to equities and are attracting new investors. That’s little consolation for those who bought a year ago and saw big losses due to the impact of rising interest rates on bond prices.”

Cummings said January’s performance was strong, especially following 10 months of net retail outflows in 2022, adding: “We can expect to see a stronger year ahead for bond investors, with higher fixed interest rates available as we transition out of a low interest rate environment.”

II data reveals flight from UK equities

The data released by Interactive Investor (II) for February corroborated several of the themes that were highlighted by the Investment Association, not least the flight from UK companies. Only one UK-focussed fund, the Fidelity Index UK, made it into the top 10 most-bought strategies, with Vanguard FTSE UK Equity falling out of the list.

Despite this, Kyle Caldwell, collectives specialist at II, struck a more positive note: “February was a month that saw the FTSE 100 index surpass 8,000 points for the first time, and the consensus view is that UK shares remain good value versus history.

“For contrarian investors, bargain opportunities are particularly prevalent amongst the mid and small-cap parts of the market, which have notably sold-off due to stagnant economic growth, high inflation, and increases in interest rates.

“Some fund managers argue share price falls over the past year or so for more domestically-facing UK businesses have been overdone, and priced in the prospect of a shallow recession. However, fund and investment trust investors continue to give their home market the cold shoulder.”

Benstead argued that UK equities have been some of the top performers over the past year, and II customers choosing collective investments flocked to the investment trust sector for their UK exposure. “Dividend heroes City of London and Merchants Trust, which have 56 and 40 years of consecutive dividend increases respectively, were among the most bought in February,” he added.

Fundsmith on top again as passives dominate

There was little change in the most-bought funds list, with Terry Smith’s equity fund remaining the most popular, while passive strategies continued their prominence.

In the investment trust space the old players, Scottish Mortgage, F&C, and City of London, occupied the top three spots, with half of the top 10 investment trust purchases reflecting a demand for income. The Renewables Infrastructure Group and Alliance Trust were the two new entrants, with both moving in and out of the top 10 over the past year.

Investors in direct equities plumped for the banks; Lloyds came out on top with Barclays and Natwest also featuring.

Top 10 most bought investments on Interactive Investor, February 2023