UK investors cash out en masse after FTSE 100’s record rally

Flows into equity funds cratered in May after a bumper ISA season, new data has shown, with investors charging out of UK stocks after a record-setting FTSE 100 rally.

Total equity fund inflows more than halved last month to £775m – two-thirds lower than the January to April average and their lowest level since November 2023, according to Calastone’s latest fund flow index.

It marked a sharp cooling in investor appetite after a strong start to 2024 that saw a record £8.9bn of inflows. Last month’s fall was largely due to a spike in outflows from UK-focused funds and lower inflows to North American funds.

Profit-taking after the recent London market rally drove £1.11bn in outflows from UK funds. This was the worst net selling since June 2022 and the second-worst on Calastone’s near 10-year record. Actively-managed UK funds bore the brunt of investor withdrawals, with £792m in outflows.

The FTSE 100 set seven record closing prices in May, fueled by increased optimism over interest rate cuts, although the blue-chip index retreated later in the month.

The outflows from UK funds will unsettle policymakers and regulators as they look to encourage more cash into the London Stock Exchange. Injecting more life into the country’s capital markets has become a key feature of both main parties’ pitch to the City ahead of the general election on 4 July.

“We often see fund inflows subside from mid-April after the ISA season is over, but this year the fall has been more pronounced than usual,” said Edward Glyn, head of global markets at Calastone.

“The prospect of interest rate cuts in the US and the UK has receded yet again, with only the ECB likely to move in the short term. Bond yields are approaching once more the post-financial crisis highs they reached in late 2023, pushing down bond prices as they have climbed.”

In contrast from the UK, investors remained positive on North American equity funds. Despite steadily slowing since a peak in February, investors still injected £826m in May – six times the long-run average.

Global funds also performed well, adding £1.44bn in their fifth-best month on record. European equities attracted healthy net inflows of £462m.

Fixed-income funds saw their second-worst month of net outflows on record at £643m – a decline not seen since the Covid-19 pandemic hit in March 2020. Meanwhile, safe-haven money-market funds absorbed £134m.

After a brief positive spell driven by the ISA season, mixed-asset funds suffered outflows of £531m in May. These funds have seen outflows in twelve of the last thirteen months, totalling a net £7.9bn.

Glyn added: “The UK stock market’s recent record highs are welcome news for UK investors who remain structurally overweight their domestic market, even following 36 consecutive months of outflows totalling £22.4bn.

“While buoyant markets usually attract new capital, many investors have seemingly chosen the UK rally as an opportunity to jump ship rather than a moment to reappraise the UK’s prospects.”