ISA investors still shunning UK funds and trusts ahead of UK ISA launch

Judging by the most popular investments with ISA investors so far in 2024, it looks like Jeremy Hunt is going to have to rely on individual stock investors to do the heavy lifting when it comes to the UK ISA.

Fund and trust investors are still very much going global with their ISA money in search of superior returns.

None of the twenty most popular funds and trusts chosen by ISA investors so far in 2024 appear to be eligible for the UK ISA, based on the rules currently proposed by the Treasury.

There is, however, some confusion over whether investment trusts will be included, even those that invest overseas, on the basis they are themselves listed UK companies. Likewise, presumably the government would look favourably on allowing Greencoat UK Wind into the UK ISA, seeing as the trust invests in a portfolio of UK wind farms.

As things stand though, the Treasury proposals for eligible investments only cover UK shares and bonds, and the funds and trusts that hold them.

The UK stock market is currently suffering from a chicken and egg dilemma, seeing as one of the reasons investors prefer overseas funds and trusts is the long-running underperformance of UK shares.

So far this year, the FTSE All Share has returned 3.3%, compared to 8.7% from the MSCI World Index. Zoom out a little, and over ten years the FTSE All Share had returned 74.1%, compared to 221.5% from the MSCI World Index. It doesn’t take a genius to work out why investors are eschewing UK funds in favour of global alternatives*.

Of course, a large part of the outperformance of global stocks derives from the success of the US tech sector, and rather than shy away from it, ISA investors seem to be leaning into this trend.

They are doing this through specifically tech-focused funds like L&G Global Technology Index and Polar Capital Technology trust, but also through S&P 500 trackers which carry a heavy weighting to the technology sector.

The wheels looked to be coming off the tech boom in 2022 as shares in the likes of Apple and Microsoft suffered a rare setback, but the emergence of ChatGPT at the back end of 2022 created a huge amount of interest in the rollout of artificial intelligence, which has provided fresh impetus to the long running bull market in technology stocks.

There are also few signs that the dominance of passive investing is under any kind of threat, seeing as eight of the top ten most popular funds are index trackers. Looking at industry-wide figures, after suffering a £38 billion retail outflow in 2023, active funds saw a further £7.5 billion heading for the exit in the first two months of 2024, according to Investment Association data. That’s actually a worsening of the run rate from last year.

They say you have to hit rock bottom to bounce back, but active managers still can’t see terra firma when they look down.

Some investors have been looking east with their ISA money, to the emerging economic superpower that is India, with both Jupiter India and Ashoka India Equity registering in the leaderboard. As China has fallen out of favour with investors, India is usurping its place and consequently its market is performing very strongly. So far this year the MSCI India index has returned 8.6%, while the MSCI China index has returned -0.4%*.

*Performance data from FE to 9 April 2024, total return in GBP

Source: AJ Bell, net flows from DIY investors in ISAs from 1 January 2024 to 5 April 2024 excluding AJ Bell funds