UK-Focused Funds Face Outflows as Investors Flee Stocks

The UK-focused equity funds have been hit hard by persistent outflows, with investors pulling cash from the market in droves. According to Calastone, the largest global funds network, UK-focused funds have experienced their 31st consecutive month and third straight year of net outflows in 2023. The total amount of capital withdrawn from these funds reached £21.3 billion over 35 consecutive months of selling, despite the FTSE 100 index reaching record highs.

The persistent underperformance of UK equities has likely discouraged investors from allocating capital to UK-focused funds. In 2024, the UK market badly underperformed most of its global peers, intensifying the shunning of UK-focused funds by investors. Higher interest rates and economic uncertainty have also led investors to dump underperforming UK equities in favor of cash, contributing to the net outflows from UK-focused equity funds.

The shift towards passive funds has exacerbated the trend of outflows from UK-focused equity funds, as investors have sought cheaper and more diversified investment options. In 2024, investors committed £29.65bn to passive equity funds, more than in the previous four years combined, while withdrawing £2.43bn from actively managed counterparts. This trend has contributed to the overall trend of outflows from UK-focused equity funds, as investors have reallocated capital away from actively managed funds and towards passive funds.

Investor preference for global and US equities has also contributed to the ongoing outflows from UK-focused equity funds. In 2024, global and US equity funds saw significant inflows, while UK-focused funds suffered another year of outflows. This preference for non-UK equities has been a consistent trend, with North American equities leading the way in terms of inflows.

The persistent underperformance and negative sentiment towards UK equities have led investors to seek opportunities elsewhere, contributing to the ongoing outflows from UK-focused equity funds. Despite the recent record highs in the FTSE 100 index, investors remain cautious about the UK equity market, preferring to allocate their capital to more attractive global markets.

In conclusion, the persistent outflows from UK-focused equity funds can be attributed to several factors, including the underperformance of UK equities, higher interest rates and economic uncertainty, the shift towards passive funds, and investor preference for global and US equities. As investors continue to seek more attractive investment opportunities elsewhere, the UK-focused funds face an uphill battle to regain their appeal.