The head of investment analysis at Salford-based AJ Bell has said the UK funds industry is going through a “dark age.”
AJ Bell head of investment analysis Laith Khalaf’s opinion came on the back of news that £108 billion was withdrawn from funds in two years, according to new data released by the UK’s Investment Association (IA).
Khalaf said the “active” fund industry is facing an “existential crisis.”
He said that in 2023, UK equity funds “saw their worst year since comparable records began with £13.6 billion of retail outflows.”
Khalaf’s said £38.1 billion was withdrawn from active funds in 2023 by retail investors — “again the worst outflow since comparable records began.”
Khalaf said: “The UK funds industry is going through a dark age. £51 billion has been withdrawn from funds by UK retail investors in the last two years.
“Add in institutional outflows and the number rises to £108 billion. The scale of these withdrawals is absolutely unprecedented.
“For some context, in the depths of the financial crisis the fund industry still saw a very small inflow of £202 million. There are a number of reasons investors might be taking money out of investment funds.
“One is the cost-of-living crisis has meant more people relying on their savings to meet day to day spending needs. High interest rates have also raised the relative attractiveness of cash.
“Indeed it’s notable that money market funds were a bright spot in the gloom, becoming the best-selling asset class in 2023. These funds allow investors to benefit from higher interest rates and are available in stocks and shares ISAs …
“The pain is not being shared amongst the investment industry equally either. Active managers, and UK equity fund managers, are at the extremely sharp end of proceedings.
“UK equity funds saw their worst year on record in 2023 for outflows, somehow eclipsing an utterly diabolical 2022.
“£13.6 billion was withdrawn from these funds in 2023, compared to £12 billion in 2022. This doesn’t augur well for confidence in the UK stock market, which is leaking members and performance to overseas competitors.
“The chancellor hopes to revive the fortunes of UK stocks through a British ISA and a Tell Sid style campaign reminiscent of Margaret Thatcher’s privatisation of British Gas.
“But when it comes to funds, Sid isn’t listening. UK equity funds have been in outflows for eight years now and while the government might want to see a U-turn, these latest figures show that UK fund investors aren’t for turning.
“There are a number of reasons why money is flowing out of UK funds …
“We have also seen a 46% rise in annuity sales in 2023, according to the Association of British Insurers. Many of those buying annuities would otherwise be likely candidates for an investment in UK equity income funds with their pension pot.
“There may also be some good news for confidence in the UK stock market in the fact that many DIY investors prefer to buy UK shares.
“Nine of the ten most bought shares on the AJ Bell platform last year were UK stocks, and the propensity of investors to buy individual UK shares may well relieve them of the need to buy UK funds in the rest of their portfolio.
“Investors may be more inclined to buy UK companies because of familiarity, or because they are looking to put together their own income-producing portfolios.
“The active fund industry is also facing an existential crisis. £38.1 billion of money was withdrawn from active funds in the course of 2023, on top of £37.9 billion of outflows witnessed in 2022.
“Meanwhile passive funds continue to hoover up sizeable chunks of money, leaving the active management industry to fight over the crumbs.
“Perhaps more concerning is the persistency of the problem. Four out of the last six years have now seen negative retail flows for active funds.
“Part of the problem is that many active funds have not been delivering on their side of the bargain. Our latest Manager versus Machine report found that less than a third of active equity funds outperformed a passive alternative over a ten year period.
“On top of this, many consumers appreciate the simplicity of an index tracker, especially less experienced investors who don’t want to spend time getting to grips with active fund selection.
“Financial advisers have also embraced passive investing as a way to reduce costs and risks for investors, both within the multi-asset funds and model portfolio services that they use.
“As we go through this year, inflationary pressures should abate and interest rates are likely to fall, which should mean a more favourable climate for investment funds.
“However on current form it looks likely to be overseas and passive funds that reap the biggest rewards. UK and active fund managers might simply be hoping for some damage limitation.”
The year-end data published by the Investment Association (IA) shows UK savers took £24.3 billion out of funds in 2023.
This is down from 2022’s outflow of £26.9 billion and is only the second year that an annual outflow has been recorded.
The IA said Money Markets was the bestselling asset class, closing the year with £2.2 billion invested overall. Fixed Income was second, with an inflow of £716 million.
“Equity funds faced a challenging year, experiencing £22 billion in outflows,” said the IA.
“This was largely driven by UK equities, which saw £14 billion in outflows in the eighth consecutive year of outflows.”
Miranda Seath, Director, Market Insight & Fund Sectors at the Investment Association, said: “The cost-of-living crisis and economic uncertainty has continued to impact households across the UK, with investors withdrawing just under £24.3 billion from funds.
“The impact of higher interest rates was a key factor in retail investor activity and decision-making. Cash savings accounts offered attractive interest rates for the first time in over a decade, impacting net retail sales.
“Investors showed caution, opting for a flight to safe assets in UK gilts and Government bonds, which also saw rising yields in 2023, Money Market funds came out on top as the best-selling asset class, and investors also opted for low-cost tracker funds, which saw strong inflows of £14 billion.
“Meanwhile, equity funds faced a challenging year. UK equities hit a record outflow at £14 billion in the eighth consecutive year of outflows. Responsible investment funds saw flat sales in the first half of the year and experienced a decline in popularity towards the end of 2023.
“As we look ahead, we will see how UK investors respond to market shifts in 2024. When, how fast and how far Central Banks cut interest rates remains crucial.
“In January, investors took out £1 billion out of funds, however Tracker funds continued to see strong inflows at £1.7 billion. It is also an election year in the US, India and UK, and political change could impact the investment outlook.
“However, the impact of the market shocks we saw in 2022 have dissipated to a large extent.”