The last two years have seen unprecedented levels of outflows from funds invested in UK equities.

Across the course of 2022 and 2023, around £25 billion was withdrawn from these funds by retail investors. This isn’t a new phenomenon. UK funds have seen outflows every year since 2016, to the tune of £46 billion in total. This feels like a significant and longstanding shift in consumer behaviour, so what precisely is going on?

COST OF LIVING PLAYS A PART 

Certainly, the cost-of-living crisis has played a part in the scale of the outflows seen in the last couple of years. With energy and food costs at uncomfortable levels, people’s discretionary income has been eroded, which has left them little to save and invest, and some people may even have had to withdraw savings and investments in order to cover their day-to-day expenditure.

Higher interest rates have helped to lure some investors away from the stock market towards cash products too. 

The UK may have had more than its fair share of quitters because it’s a high yielding market, and so favoured by income-seekers who might be vulnerable to the temptations of cash.

But none of that really explains why UK funds have been hit so hard, or why they were so out of favour even before inflationary pressures started to build, and interest rates rose.

PERFORMANCE ALSO A CONTRIBUTING FACTOR 

Performance undoubtedly has a part to play in weak investor sentiment towards the UK. As the chart below shows, the UK has underperformed the global stock market for eight of the last 10 years, and it’s started off this year in the same fashion.

Absolute returns haven’t actually been too bad, with the FTSE All Share returning 68% in the ten years to the end of 2023. But of course, everything is relative. When investors have looked at their annual valuations, they have seen much larger gains from their global funds than from their UK ones. Little wonder they have plumped for the former over the latter.

LOOKING FOR DIVERSIFICATION

We have also seen investors unwinding their home bias, and this comes down to a more global way of thinking about portfolio construction, by financial advisers and DIY investors alike. UK equity funds accounted for 51% of all equity fund assets held by retail investors 2009, with the remainder made up by other regional and global equity funds. That has now shrunk to 27%.

Clearly a large part of that shift can be attributed to weak UK performance relative to other areas, but fund flows have also been a factor, as investors have sought out overseas opportunities and also realigned their portfolios to take less regional risk by carrying such a large UK bias. 

The UK now makes up just 4% of the global developed stock market, so with an average of 27% invested in the UK, retail investors are still heavily overweight the domestic market. Worryingly, that might mean the trend to a more global way of investing money may spell further outflows from the UK.

AN UNLOVED MARKET

What seems clear is the UK is currently very unloved by fund investors, and for what seems like a long time now, market commentators have been talking about a stock revival that hasn’t materialised.

For those still holding UK funds, disappointment may be starting to turn into frustration. But performance can be a fickle beast, and the prevailing winds can shift pretty quickly when they do change direction. Whether there will be some catalyst in 2024 for a resurgence in the UK stock market on the global stage remains to be seen.

But a positive spin on negative sentiment is that at least when UK investors look down, there isn’t that far to fall. In the meantime, the one good thing about the UK stock market is many companies pay a handsome dividend, and so there is something to tide investors over while they wait for a turnaround in fortunes.

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