October was a bleak month for fund flows, with UK investors withdrawing £4.2 billion from equities in a pre-Halloween horror show, according to figures published by the Investment Association today. Global and UK equity funds were the worst hit.
An additional £1.7 billion was withdrawn from other asset classes including bonds and mixed asset funds, bringing total outflows across the funds industry to £5.9 billion.
It could be little more than a temporary blip, though, with the Investment Association blaming the Autumn Budget for the disruption. The industry body says investors sold down assets in anticipation of a capital gains tax (CGT) hike, hoping to realise any gains at a lower tax rate.
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“As details became clearer on the scope and depth of the government’s impending tax reforms, it was inevitable that some investors would make changes to avoid an increase in their tax liability,” says Miranda Seath, market insights director at the Investment Association.
Some investors also withdrew money from their pension in advance of the Budget, fearing a rule change on the tax-free lump sum. This may have contributed to outflows in October, despite the policy never materialising.
Global and UK equities saw the biggest outflows
All equity regions were in outflow in October, but global equity funds bore the brunt of the selling, with investors withdrawing £1.8 billion. UK equities were the second-worst hit with £1.3 billion withdrawn, their worst month since May 2024.
UK equity funds have been bleeding assets for several years now, after investors turned sour on the domestic market in the aftermath of Brexit. UK economic growth has been weak, and critics often argue that the UK market is unexciting with a lack of innovation in areas like technology.
By comparison, Big Tech has driven sparkling returns in US equity markets in recent years. So far this year, the S&P 500 is up 28% compared to around 8% for the FTSE 100.
The plus side is that UK companies are currently trading at large valuation discounts, creating opportunities for bargain stock pickers. But it is a double-edged sword, with private equity investors also swooping in to take UK companies private.
Several companies have also deserted the London Stock Exchange voluntarily, listing overseas in the hope of higher valuations.
“For UK equities, the near-term outlook remains challenging,” says Seath. “Yet, if Labour can successfully deliver the economic growth in the domestic economy it has promised, we may see green shoots of growth and with it the longer-term potential for a return to investor appetite for funds investing in their domestic market.”
In some good news, separate data from funds network Calastone suggests UK equity funds received net inflows in November (the month after the Budget) for the first time since May 2021.
“It’s likely that after pulling out money in September and October, investors felt more confident once they received clarification around the tax changes in Rachel Reeves’ Budget at the end of October,” says Kate Marshall, lead investment analyst at Hargreaves Lansdown.
Enthusiasm for index funds continues
Index-tracking funds were the only area that saw inflows in October, according to the Investment Association, with net sales of £880 million. This was the lowest inflow in a year, but in a month where all other areas bled assets, it can be seen as another win for passive over active investing.
Over the past few years, equity market returns have been driven by strong performance among a concentrated group of stocks. The S&P 500’s performance so far this year would look very different without the Magnificent Seven tech stocks, for example.
“This can be clearly seen when you compare the S&P 500 with the S&P 500 Equalweight,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown. “The S&P 500 EWI includes the same constituents as the capitalisation-weighted S&P 500, but each company is allocated a fixed weight. Year-to-date, the S&P 500 is up 28.3% but the S&P 500 Equalweight is only up 17.6%,” she adds.
This concentrated outperformance among a small group of stocks has created a challenging environment for active fund managers. If they follow the market and replicate the benchmark, it becomes difficult to justify their higher fees. Meanwhile, if they diverge too far from the benchmark and a concentrated group of stocks continues to outperform, they could be left in the dust.
Against this backdrop, investors have been increasingly opting for ETFs, which offer diversified access to equity markets at a low cost.
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