The UK investment industry is enduring a “dark age”, says AJ Bell, as new data revealed £108 billion has been withdrawn from funds in two years.
Data from the Investment Association showed £51 billion has been withdrawn from funds by UK retail investors in the last two years, rising to £108 billion when combined with institutional outflows.
According to the Investment Association, 2023 was the worst year for UK equity funds since records began, with £13.6 billion of retail outflows. Meanwhile, £38.1 billion was withdrawn from active funds last year by retail investors, once again marking the worst outflow since comparable records began.
Laith Khalaf, head of investment analysis at AJ Bell, said: “The UK funds industry is going through a dark age. The scale of these withdrawals is absolutely unprecedented. For context, in the depths of the financial crisis the fund industry still saw a very small inflow of £202 million.”
AJ Bell said there were a number of reasons investors might be taking their money out of investment funds. One is the cost of living crisis, which has led to more people relying on their savings to meet day-to-day spending needs. In addition, high interest rates have raised the attractiveness of cash.
The investment platform said the pain was not being shared amongst the investment industry equally, with active managers and UK equity fund managers at the “extremely sharp” end of proceedings.
Khalaf said: “UK equity funds saw their worst year on record in 2023 for outflows, somehow eclipsing an utterly diabolical 2022. This doesn’t augur well for confidence in the UK stock market, which is leaking members and performance to overseas competitors. The Chancellor hopes to revive the fortunes of UK stocks through a British ISA and Tell Sid style campaign. But when it comes to funds, Sid isn’t listening. UK equity funds have been in outflows for eight years now and while the government might want to see a U-turn, these latest figures show that UK investors aren’t for turning.”
At the same time, 2023 saw a 46% jump in annuity sales, with many of those buying annuities likely to have been candidates for an investment in UK equity income funds with their pension pot. However, Khalaf said there may be some good news in the fact that many DIY investors prefer to buy UK shares. Nine of the ten most bought shares on the AJ Bell platform last year were UK stocks.
The active fund industry also experienced a challenging year in 2023, with £38.1 billion withdrawn, on top of the £37.9 billion of outflows witnessed in 2022. Four out of the last six years have now seen negative retail flows for active funds.
Khalaf said: “Part of the problem is that many active funds have not been delivering on their side of the bargain. On top of this, many consumers appreciate the simplicity of an index tracker, especially less experienced investors who don’t want to spend time getting to grips with active fund selection. Financial advisers have also embraced passive investing as a way to reduce costs and risks for investors, both within the multi-asset funds and model portfolio services that they use.”
He added: “As we go through this year, inflationary pressures should abate and interest rates are likely to fall, which should mean a more favourable climate for investment funds. However, on current form it looks likely to be overseas and passive funds that reap the biggest rewards. UK and active fund managers might simply be hoping for some damage limitation.”
