Investors took £25.7 billion out of funds in 2022, with £282 million exiting in December, amid a difficult economic and geopolitical environment, according to the latest net retail sales figures from the Investment Association.
It was the first year on record in which fund sales to retail investors have been negative.
Laith Khalaf, head of investment analyst at AJ Bell described it as a “dark year” for the UK’s fund management industry.
Khalaf said 2022 eclipsed other weak periods that occurred following the dotcom crash, the Brexit vote and in the depths of the financial crisis. “The figure is so starkly at odds with what went before that it requires at least one double take,” he said.
“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.”
Khalaf said there were a number of factors which could go towards explaining why 2022 was such a challenging year for retail fund sales.
Khalaf continued: “The sell-off was long and sustained, with only two 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.”
Source: Investment Association, prior to Jan 2012 data is presented according to Net Sales for UK Domiciled funds
The figures showed that UK equity funds suffered £12 billion in outflows last year, while North American funds saw £681 million of inflows despite a bear market. It was the only regional equity market to register a positive figure and according to Khalaf, shows that UK retail investors “are still very much in thrall to the bright lights of the US equity market.”
Khalaf continued: “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.
“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.”
Khalaf said that investors and advisers may decide to trim their UK holdings to bring their overall portfolio more in line with the global stock market.
The Investment Association’s data showed that responsible funds bucked the trend for the year, recording inflows of £5.4 billion, while tracker funds saw net inflows of £11 billion.
Khalaf noted that previous challenging years in 2008 and 2016 were followed by twelve months of bumper inflows and said it would be “almost unthinkable” that 2023 will be anything but an improvement on last year’s performance.
“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,” he added.
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