Rebound fails to stem UK equity fund outflows
British retail investors have spurned funds that back UK companies in spite of growing confidence in the economy as it rebounds from the Covid-19 crisis.
Funds invested in UK equities recorded £2.2bn in outflows during the first half of the year, according to data from the Investment Association (IA), an investment industry trade body. The slump came as net retail fund sales jumped to £24bn in the best start to the year for the sector since 2017.
A strong recovery in the UK economy following the rollout of Covid-19 vaccines and the settlement of Britain’s divorce from the EU showed no sign of reversing the drain of cash out of UK equity funds. A shortage of tech stocks and lower dividends have weighed on UK funds, which have suffered outflows each year since 2016, when the UK voted to leave the EU.
“There is quite a long term shift away from a home bias towards a more global investment outlook,” said Miranda Seath, IA head of market insight.
Strong fund sales overall reflected sustained investor confidence as markets marched higher and the economic recovery from the pandemic gathered pace, Seath said. Global equity funds drew the strongest inflows, at £7.3bn, while the UK was by far the worst performing region.
The reduced appetite for UK funds among savers comes as private equity groups swooped on UK-listed companies in the first six months of 2021, with a surge in takeover bids as buyout groups looked to capitalise on relatively low valuations. Several major investors have voiced concern about private equity “raids”, with some arguing there is not enough domestic support for British companies.
Retail investors and their financial advisers have pulled more than £18bn from UK equity funds since 2016, according to the IA’s data. Outflows in the first part of 2021 were among the largest in recent years.
The government has been keen to promote investment in the UK following the Brexit settlement, plotting a number of regulatory changes to boost the attractiveness of London markets. Boris Johnson, prime minister, and chancellor Rishi Sunak stepped up their efforts to woo institutional money managers in a letter last week calling for an “investment big bang” to back British assets.
But efforts to build momentum behind investing in Britain have not found favour among retail fund buyers. Investors have been put off in part by the decline in dividends from British companies during the pandemic. UK companies historically offered attractive levels of payouts to shareholders, but have been slower to restore them to pre-pandemic levels than businesses in other regions.
“Investors looking for income have been talking with their feet though the first half of the year,” said Dominic Rowles, investment analyst at investment broker Hargreaves Lansdown. Income funds suffered the worst outflows during the first half while funds investing in small and mid-sized UK companies attracted inflows, he added.
James Rainbow, head of UK distribution at Schroders, said the underrepresentation of popular tech stocks in UK markets was another factor driving investors elsewhere.
“I think if you look at the characteristics of the UK stock market, it’s not a huge surprise that we’ve been out of favour,” said Rainbow. “The question is at what point do the valuation differences get to the stage where the UK becomes sufficiently attractive to draw investors back again.”