Investors around the world shunned UK-focused equity funds in January, pulling net £868m from their holdings according to Calastone’s Fund Flow Index.
January was the third-worst month for outflows in the sector, despite the FTSE 100 reaching record highs; for every £1 of sell orders of UK-focused funds, there was just 59p of buy orders. Not a single trading day saw net buying, and the report stated that no other fund sector saw a mismatch this large.
Calastone’s report revealed that January’s sell-off, though severe, was not unordinary. UK-focused funds have experienced capital outflows for a record 20 consecutive months, and over the last eight years investors have pulled net £7.28bn. November 2022 was the second-worst month since Calastone launched its index, with investors pulling £1bn from UK equity funds, marginally lower than the £1.1bn of net outflows the sector suffered in June last year.
Since 2015, equity funds focused outside the UK enjoyed inflows of £58.04bn, and January saw the money continue to flow in. The MSCI World has risen 18% since October’s dip, and the Fund Flow Index showed that investors injected £969m into global equity funds in January, building on strong buying from mid-October onwards.
China’s reopening has also bolstered confidence in Asia Pacific and emerging markets, according to the report.
Edward Glyn, head of global markets at Calastone, said: “UK equities used to be a core holding for global investors, but, dominated by a few big cyclical sectors like oil and commodities or slow-growth giants like banking, pharma, and tobacco, they now occupy a dusty and diminished corner of these big portfolios. Political instability and a sense of unstoppable decline are keeping investors away from the UK too.”
Glyn also identified that UK shares have lost their allure for domestic savers as well: “The combination of January’s near record high for the UK market with near-record outflows smacks of opportunistic selling against a backdrop of chronic pessimism, exploiting a moment of higher prices to head for the exits.”
He added that weightings to UK equity funds are coming from a high base, so even relatively attractive valuations may not be enough to persuade domestic savers to add more cash to their home market.
Glyn argued that 2022 was a good year to hide in UK equities, but that global strategies were more likely to benefit from the return to bull-market conditions this year. However, he warned that this confidence may be premature. “Although interest rates globally are still on the up and corporate earnings are coming under pressure, this is not yet fully reflected in global markets,” he said.
Better fortunes for fixed income
Contrary to the dismal period for UK equity funds, fixed income strategies enjoyed their second-largest inflows on record, topped only by the £1.57bn seen in May 2018. Over the last 12 months, inflows to bond funds have totalled £3.84bn, while equities have shed a net £6.62bn over the same period, according to Calastone.
Glyn pointed out that bonds are offering the best yields in over a decade, and though central banks are still raising policy rates, dovish comments from the governor of the Bank of England have raised hopes that the UK’s rate-tightening cycle is at or near its peak.
“The developing slowdown in the economy and moderating inflation are also likely to push market interest rates lower in the months ahead. All this could signal capital gains to bondholders over time too,” he added.
The bond funds most in favour in January were tilted to the higher quality end of the market (sovereign or investment grade corporate debt), with Glyn suggesting that investors are content to sidestep riskier high-yield corporate bonds at present.
