Laith Khalaf, head of investment analysis at AJ Bell, has commented on the IA report:
“It’s been a dark year for the UK’s fund management industry, with money flying out of the door by the boatload. 2022 was the worst year for fund sales on record by a country mile, totally eclipsing other weak periods that occurred following the dotcom crash, around the Brexit vote, and in the depths of the financial crisis.
“Indeed, 2022 is the only calendar year in which fund sales to retail investors have been negative, and not by a few pennies either, but to the tune of over £25 billion. The figure is so starkly at odds with what went before that it requires at least one double-take. The pain for the investment management industry is compounded by £24.4 billion of institutional fund outflows, taking the total net outflow for the year to an astonishing £50.1 billion.
Source: Investment Association, prior to Jan 2012 data is presented according to Net Sales for UK Domiciled funds
“There are a host of factors which go towards explaining why 2022 was such a dire year for retail fund sales. The sell-off was long and sustained, with only 2 months of the year seeing a positive flow into funds. It was also spread across both equities and bonds, as rising interest rates threatened both asset classes, and longstanding investors could be forgiven for taking some extremely healthy profits. A bear market in the US also helped to undermine confidence, even though the domestic FTSE 100 turned in a decent year of performance. And of course, the pressure on UK household finances has no doubt led some to encash their investments, and others to simply refrain from investing until the inflationary storm clouds have passed.
“There were some winners amongst the gloom though. Despite a bear market in US stocks, North American funds still saw £681 million of inflows across the year, the only regional equity market to register a positive figure. That shows that UK retail investors are still very much in thrall to the bright lights of the US equity market. At the other end of the spectrum, UK Equity funds saw £12 billion of outflows, despite the FTSE 100 having a positive year. The rot is now so deeply entrenched in UK fund sales that it is difficult to see this trend reversing in any significant way.
“It’s easy to attribute the extreme and longstanding negativity towards UK funds as part of the post-Brexit crisis of confidence the UK seems to have wandered into. But there are more prosaic factors which may explain UK fund outflows. Past performance inevitably informs some fund buying decisions, and on a three-year view, the US stock market is still riding far above the FTSE 100. Indeed the fall in the pound versus the dollar tempered the bear market in the S&P 500 to such an extent that UK investors in US funds might well be wondering what all the fuss is about.
“At the same time the rise in index-aware investing may also be driving money out of UK funds. The UK equity sectors still have large sums of money in them, despite recent outflows, as a result of this being the area fund groups and fund buyers focused their attention on long before international investing became the flavour of the day. The proportion of investors’ money held in these UK equity funds still far outweighs the UK stock market’s 4.4% weighting in the MSCI World Index. If you’re an investor or an adviser therefore, up against a benchmark index, you might well decide to trim your UK holdings to bring your overall portfolio more in line with the global stock market. The continued outflows we have been seeing from UK equities are no doubt partly driven by relatively weak performance, but there is probably also a secular portfolio reallocation trend occurring too.
Source: Investment Association
“Tracker funds and ethical funds also posted positive years for fund sales, seeing net inflows of £11 billion and £5.4 billion respectively. Putting these together with the overall £25.7 billion of net retail outflows from funds suggests that active, non-ethical funds saw £42 billion of outflows. It’s a tough time to be an active manager without an ESG halo on your head.
“If the funds industry wants to take something positive from a calamitous year, perhaps it’s worth noting that previously poor years in 2008 and 2016 were followed by twelve months of bumper inflows. Another glimmer of light is that outflows moderated towards the end of the year, and it’s almost unthinkable that 2023 will be anything but a significant improvement on last year’s showing. Ultimately there remains a pressing need for the funds provided by the investment management industry, as consumers still need to put money away for their long term financial goals, even though that might be somewhat put on hold while inflationary pressures work their way through the economy.”
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Read our update on the IA’s report here.
