UK funds suffer record outflows in 2022 amid cost of living crisis

Investors pulled out a record £25bn out of funds in 2022 to help fund cost of living

A woman sitting at a table in her home, working on her family finances
(Image credit: © Getty images)

Investors have been forced to raid their investment pots to help tackle rising inflation, with latest data from the Investment Association revealing fund outflows hit an eye-watering £25.7bn last year. This also marks the worst year on record for fund outflows.

December 2022 marked the tenth consecutive month of net retail outflows, according to data from the Investment Association. It’s the first time a high annual outflow has been recorded; retail funds saw £4.2bn worth of sales even after the global financial crisis in 2008.

“It is no surprise to see investors turned off markets in 2022, a year of extreme economic and political turmoil,” says Emma Wall, head of investment analysis and research at Hargreaves Lansdown.

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What has caused investors to take money out investments?

Investors had to contend with double digit inflation – currently UK inflation is sitting at 10.5% – as well as a cost of living crisis driven by rising energy prices and record grocery price inflation.

The markets were also rocked in September following the mini-Budget announcement, which included a series of unfunded tax cuts that destabilised the economy and accelerated the property market’s slowdown.

The situation has since improved and in fact, the FTSE ended on a high last week following market sentiment that the UK recession may not be as bad as expected.

The worst-selling sector in December was UK All Companies, which saw outflows of £1bn.

But we “shouldn’t look at the past year in isolation, because it comes after a roller-coaster three years of social, emotional, economic and market turbulence – we are living in an age of uncertainty,” says Dzmitry Lipski, head of funds Research at interactive investor.

Which sectors performed better?

UK gilts were the Investment Association’s third best-selling sector in December 2022, recording net retail sales of £127m.

Swipe to scroll horizontally
Best selling investment association sectors
SectorNet retail sales
North America£358m
UK Gilts£127m
Targeted Absolute Return£107m
Global Equity Income£98m

Tracker funds also experienced inflows of £696m in December 2022, while responsible investment funds saw inflows of £9m.

What’s the outlook for UK retail funds in 2023?

Despite a dismal year, things already appear to be looking up. “2023 has got off to a more optimistic start, with the FTSE 100 flirting with record highs, and the US market being led by better-than-expected results from a number of the tech giants, and falling inflation,” says Wall.

Last Friday 3 February the FTSE 100 recorded hit an all time high, a sign that investors believe global inflation might be easing and central banks are nearing the end of their series of steep interest rate rises.

The blue-chip index has since fallen back, but its peak was “brief but significant, and particularly good news for investors in the UK’s blue-chip index,” says Richard Hunter, head of markets at interactive investor.

“There are no guarantees, but history shows us that the best years can often follow the worse,” says Lipski. “It’s so important to try to get out of the habit of buying high and selling low. One of the best ways to deal with volatile markets is to invest on a monthly basis, smoothing out some of the highs and lows in the price of shares.”

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.