Every month we look at the latest inflows and outflows of UK-domiciled funds, and those with a UK focus very often end up seeing quite significant redemptions. Is there a reason we don’t like investing in our own funds?
The UK is famous for having large industry stalwarts at the top of the FTSE 100, but for some investors, it doesn’t have as many high growth companies as in the US. But is that reason enough to place your investments elsewhere? And where does that leave bond funds?
We’ve had a look at the flow data for the past 10 years and according to Morningstar Direct, funds with a focus on UK, whether that’s fixed income or equities, are significantly less popular than those with a global focus.
Large-caps and income funds are categories that are particularly unpopular, despite our obsession with dividends. Over the past 12 months, the UK Large-Cap Equity category saw £8.7 billion in outflows, and UK Equity Income saw outflows of £4.6 billion.
As Morningstar’s manager research analyst Bhavik Parekh has previously stated, the outflow seen by UK equity income funds in particular can be attributed to two factors: weak returns and a lack of new funds.
“Firstly, some of the typically strongest dividend payers have tended to be those who have had relatively poor capital appreciation,” Parekh explains.
In the past few years, this has included banks, tobacco, and oil. Dividends might have been good but share price growth has been relatively slow (setting aside the recent jump in oil prices). As such, total returns (income and capital) have been behind funds without an income requirement, and especially international funds.
“Secondly, many UK equity income funds have matured, meaning investors are withdrawing their assets for retirement or to invest in newer areas of the market such as in sustainable vehicles.”
Unsurprisingly, we’ve seen net outflows from UK-focused funds since the start of the pandemic in 2020, which saw outflows, then all inflows. Allocation funds have largely been the only ones with consistent inflows, but, it is important to note here that not all funds in this category invest solely in the UK, despite being hedged against sterling. In fact, several of these have a global focus on the equity side.
UK equity funds have had the largest outflows these past years, and as previously mentioned, large-cap and income funds have particularly suffered. Pre-Covid, however, the flows were seriously inconsistent, jumping from billions in outflows one month to billions in inflows the next.
The landmark year of 2016 (remember Brexit?) also stands out as a marker for a shift in fund flows. Fixed income was notably very unpopular up until this point, seeing net inflows in only one of the quarters up until that point. After 2016, the flows have been noticeably more popular, with bond funds receiving almost £1bn in Q4 2019. Property funds however, had the opposite result. A largely popular category pre-2016, property vehicles gated post-Brexit and during the pandemic. Opening these funds again saw £1 billion in outflows in Q2 2021.
That said, in April this year, GBP Government Bond was the third most popular fund category. Gilt funds had £482 million in subscriptions, with BlackRock’s Silver-rated iShares UK Gilts All Stocks Index attracting £262 million alone. The fund is off 9.4% so far this year, following a 5.2% fall in 2021. UK Large-Cap Equity was the second most unpopular with £1 billion in redemptions.
But UK Stocks Have Done Well
Meanwhile, the Morningstar UK Large Cap Index has had fairly solid returns. It grew 20% in 2021 as stocks rebounded from the pandemic, with an annualised return of 6.52% over the past 10 years. So far this year, however, the returns have only been 3%, but this is set against a backdrop of the war in Ukraine, soaring inflation, and the Bank of England preparing for recession.
The Morningstar UK Dividend Yield Focus index has had a slightly more disappointing long-term result. In the past 10 years, it’s only grown 1.68%. It did grow 11% in 2021 but is so far down 17% in 2022.
The past month was particularly rough for global stocks, which continued into May, with the UK caught up in this volatility.
Seb Jory, who manages TM Tellworth UK Select, says that while limited progress is frustrating, there is still opportunities to be found because of large inconsistencies in the market’s assessment of recessionary risks. “The inflation-headline-obsession here that seems to have separated UK retail from all other cyclicals should, we think, be faded. We would continue to argue for a selective small long in UK retail – much of the pain has been taken.”