Investment in UK equities has fallen to a record low after investors withdrew close to £13 billion in recent years amid economic uncertainty and a weaker FTSE 100.
New figures from the Investment Association found allocations to UK equity funds as a proportion of total UK investor funds under management fell from 39% in 2005 to 14% by June 2020.
The downward trend intensified following the announcement of the EU referendum, with UK equities sustaining outflows of £12.7 billion between January 2016 and June 2020.
The findings from the trade body have highlighted the extent to which UK equities have lost their appeal with UK retail investors, according to Darius McDermott, managing director of Chelsea Financial Services (below).
He says: “It’s long been known that overseas investors have been shunning UK equities in light of ongoing Brexit uncertainty, and UK investors have also been slowly diversifying their portfolios over a number of years, but the magnitude of the fall in asset allocation does surprise me.
“Over the past few years, the UK stock market has struggled to keep up with its developed market counterparts and this underperformance has been exacerbated in recent months. But while the overhang of Brexit has impacted the UK stock market’s recovery from the March lows, arguably the bigger reason is the traditional composition its largest companies, many of which are financials, consumer discretionary and oil & gas firms – all value areas that are out of favour and struggling in the current climate.”
With interest rates likely to remain low for the foreseeable future, McDermott believes UK equities will continue to find themselves out of favour with investors.
McDermott adds: “If a vaccine was delivered or the Brexit deal was positive – or we even got both – we could see a bounce in some of those unloved sectors.
“In the absence of any of those scenarios, UK smaller companies are an option as they have fared better and are not so heavily weighted to the value areas of the market. For those wanting to invest against the herd and take advantage of the UK stock market’s lower valuations, I’d suggest they look at funds such as TB Amati UK Smaller Companies, LF Tellworth UK Smaller Companies or Marlborough Special Situations.”
