A general sense of caution saw £1.3bn ($1.7bn, €1.56bn) of retail outflows from equities in January, with investors preferring the safety of money market funds and mixed asset funds as they wait to see how markets will develop over the course of 2022.
With £1.6bn of outflows, the region continuing to take the brunt of the outflows is the UK, with the IA UK All Companies sector the worst seller in January with investors redeeming £1.4bn from funds.
To put this into context, the most popular sector in January was Short Term Money Market, which saw net inflows of £838m, while mixed asset funds were the second most popular asset class seeing inflows of £335m.
For UK equities, January’s net outflows are a continuation of a theme seen throughout last year. According to the IA in 2021 the IA UK All Companies saw net outflows of £2.62bn, while the IA UK Equity Income sector was even less popular, witnessing redemptions totalling £3.28bn.
“The UK has been much maligned in recent years for the makeup of its stock market, with energy and financial stocks considered unattractive and dominating the market capitalisation of the FTSE 100 compared to other major markets,” said Nick Wood, head of fund research at Quilter Cheviot.
However, Wood noted that this year UK equities have undergone somewhat of a renaissance, with the UK down just 0.3%, compared with the MSCI World ex UK, which is down 8.4%.
Missing out
Yet this trend has come at the expense of another. Wood said while active investors in the UK market have generally been able to produce significant outperformance over the long term, with the average IA UK All Companies fund about 7 percentage points (pps) ahead of the FTSE All-Share over the three years to end December 2021, he noted this has switched in 2022.
The peer group average has instead lagged by 3.3pps in January, and year over to 18 February, Wood noted it has continued to fall with it now being 4.2pps behind.
“The UK market has struggled in recent years, partly due to its inherent value bias,” Wood said. “The likes of the banks and big energy companies have a higher weighting in the UK market than other global markets. The racier growth companies have tended to sit in the mid-cap space instead.
“As we have seen, there has been a market rotation to value stocks and this has meant financials and energy outperforming and helping to drive the overall index returns. Most active managers will have had some exposure, but certainly very few were overweight the top five stocks in the index.”
With performance drivers flipping, Wood said this has meant many UK investors have missed out on some of the strong performance from their home market.
The data shows that in January, just 29% of funds in the IA UK All Companies sector outperformed the main market, with more than 19 funds greater than 10pps behind the index over the month.
Passive
Wood, however, does not believe this means investors should move into passive funds in the UK.
“While less than three in 10 funds have outperformed, there are still good managers out there taking advantage of that shift to value stocks,” he said. “It has also shone a light on the UK income space, which has really struggled in recent years but is enjoying somewhat of a turnaround just now.
“Most income managers naturally have a large cap bias, and given how much of the UK market’s dividends are generated by the FTSE behemoths, many have benefitted from their good performance.”
More generally, the latest data from the IA revealed that market uncertainty in January 2022 saw UK savers pull £642m out of retail funds, in the first such outflows since March 2020.
“Rising inflation and market uncertainty cast a shadow over the start of the year in the fund market,” said Chris Cummings, chief executive of the IA. “Caution saw investors opt for diversified funds to help mitigate risks, and the strong sales to Short Term Money Market funds showed savers are waiting to see how markets will develop.”
He added: “Events have moved quickly since January, and the Russian invasion of Ukraine has seen a negative reaction from markets. The crisis is deeply tragic for Ukraine’s citizens and investors have acted to show support and swiftly complied with the latest sanctions provisions.”
