UK funds suffer worst outflows on record - here’s why

A record £1.8 billion was withdrawn from UK equity funds in May, marking the continuation of a bruising period for the British stock market. 

According to figures from the Investment Association, the industry body, May was a particularly dismal month as investors opted for better-performing US stocks ahead of UK shares. Since 2016, almost £55 billion has been withdrawn from UK equity funds by retail investors.

Laith Khalaf, head of investment analysis at AJ Bell, says: “May was the worst month on record for UK equity fund flows, quite the accomplishment for a sector that has been in outflow for eight years. Even more troubling for UK asset managers is the fact the trend seems to be accelerating.”

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Indeed, the numbers come as listed UK asset manager Ashmore reported on Friday morning that clients pulled $2bn (£1.6bn) from the firm in the three months to the end of June. Meanwhile, rival UK fund manager Abrdn has seen its assets under management slump from £505bn in 2018 to £366bn at the start of this year.

 What is causing the UK outflows? 

The Investment Association says: “Diversification of portfolios remains a driving factor in UK equity outflows. Investors and their advisors continue to reallocate outside of the UK, with strong inflows for global, Europe and North American funds.”

In stark contrast flows into US funds have been stellar. North American and global funds attracted £7.8bn and £7.58bn respectively in the first six months of 2024, according to separate data from investment software provider Calastone.

The rise of passive investing has also been detrimental to flows into the UK. Khalaf says: “Tracker funds have seen the lion’s share of inflows across the industry. But passive investing logically favours a global approach, and with the UK representing just 4% of the MSCI World Index, not much of the huge wall of money invested in trackers is benefiting UK stocks.”

Weak performance from active managers, Khalaf adds, “stemming from the hegemony of a clutch of large technology stocks, combined with a focus on cost and simplicity, means the rise of passive investing almost certainly has further to run”. 

 Will UK stock sentiment recover? 

Many analysts have highlighted that London Stock Exchange-listed companies are looking cheaper than US rivals.

Michael Brown, chief investment officer at Martin Currie, highlights that real wage growth and employment data in the UK have both beaten analyst expectations while the country's manufacturing and services purchasing managers indices have all turned positive unlike its European neighbours.

“The international perception of the UK is changing,” says Brown.

“A change of government, to one more moderate and international in tone, coupled with a deterioration of European political stability, notably in France, indicates that there remains room for sterling to appreciate. This would be beneficial for lowering inflation rates even further.”

He suggests that sterling could be boosted by the Bank of England taking its time on rate cuts.

“At the same time, a reduction in the risk premium for UK assets could accelerate sterling’s move and positively surprise the equity market,” he adds.