AJ Bell: ‘savers won’t touch UK funds with bargepole’

Salford investment giant AJ Bell has highlighted the challenges faced by UK stock funds after the latest Investment Association (IA) data showed UK retail investors sold £1 billion of UK equity funds in February.

AJ Bell analyst Laith Khalaf said UK savers “still won’t touch UK equity funds with a disinfected bargepole.”

AJ Bell said retail investors have now withdrawn £18 billion from UK equity funds since 2016, triggered initially by Brexit.

Khalaf said Brexit initially triggered the “exodus” from UK equities to global equities but it has now become “an entrenched trend” in the UK retail fund landscape.

“Private investors have withdrawn £18 billion from UK equity funds since 2016, and they have invested £20 billion into global funds.

Global funds and fixed income funds registered the biggest inflows in February.

The latest Investment Association data revealed that savers placed £2.4 billion into funds in February — with £969 million invested in global equities £638 million bet on Asia equities.

The IA said fixed income was the most popular asset class with £1.4 billion in net retail sales.

Global funds had net retail sales of £1.2 billion.

UK savers looked for opportunities in smaller companies, with inflows of £252 million into North American smaller companies and £142 million into UK smaller companies.

The IA represents the UK investment management industry and its 250 members manage £8.5 trillion of assets.

AJ Bell analyst Laith Khalaf said: “Retail investors still won’t touch UK equity funds with a disinfected bargepole, despite some better performance from the cyclical companies of the FTSE 100, and the success of the UK’s vaccine programme.

“Instead they’re plumping for global funds, no doubt led by successful franchises like Fundsmith, Lindsell Train, and Baillie Gifford.

“Brexit initially triggered the exodus from UK equities to global equities, but it’s now become an entrenched trend in the retail fund landscape.

“Private investors have withdrawn £18 billion from UK equity funds since 2016, and they have invested £20 billion into global funds.

“There may well be an element of performance chasing to the long term swing from UK to global funds, which in itself helps to renew the market conditions which precipitated the shift.

“This self-fulfilling circle of performance and fund flows is virtuous for global investors, and vicious for UK equity fund managers.

“Performance chasing has proved to be a winning strategy for some considerable time now, because there has been little rotation in market leadership.

“The pandemic only served to exacerbate trends which were already well-established, in particular the hegemony of the big US tech stocks that have helped power global growth funds to the top of the performance charts.

“There has been some movement back towards cyclical, value-orientated stocks in recent months, but so far it’s been a slight swivel rather than a full blown rotation.

“As yet, it’s not long or deep enough to challenge the performance record of global growth funds, but it does serve as a warning sign for those who have weighted their portfolios very heavily to past winners.

“There’s also still a remarkably large amount of money flowing into fixed income funds, even though it’s difficult to hold a positive view on the asset class, given such historically low interest rates and a global economy that looks set to post substantial growth this year.

“£1.4 billion went into fixed income funds in February, despite yields rising on fears the inflation genie may be pushing its way out of the bottle.

“Consistently high fixed income flows are likely a result of investment strategies that robotically target low volatility assets, without paying too much attention to the prospective long term returns.

“Should interest rates rise, safe haven bonds will suffer, and end investors are likely to take a dim view of low volatility strategies that lose them money.

“That is how most consumers, quite rightly, measure risk.

“One area which does look to have run out of steam a bit is ESG investing, which posted poor fund flows in February, based on the high standards it’s been setting recently.

“Inflows slumped from £1,218 million in January to just £217 million in February, their lowest level since March 2020.

“Given the high level of continued interest in this area, this is probably a pause for breath rather than a wholesale slowdown.

“Responsible investment funds have made tremendous strides in the last year or so, and it’s natural there will be a few blips along the way.

“February was also a pretty weak month for fund sales across all equity categories, which is where most ESG funds can be found.”

Investment Association CEO Chris Cummings said: “Savers invested £2.4 billion into funds in February, with bond funds accounting for over half of inflows.

“The preference for Asian equities continues as the opening up of Asian economies following the pandemic advances ahead of Europe and the US.

“Global equities remain a perennial favourite as savers looked to spread their risk through globally diversified funds.

“Closer to home, UK Smaller Companies funds continued to buck the trend of outflows from funds investing in UK shares, receiving £142 million in February, and North American Smaller Companies funds also attracted strong inflows of £252 million.”