UK investors exit domestic funds in droves after global market rout

The hope of a rally in UK investment was thwarted last month as the number of UK investors selling out of domestic equity funds doubled due to the downturn in global markets.

UK investors pulled £510m from British-focused equity funds in August, more than double the figure in July when outflows reached their lowest level in three years, according to data from Calastone.

“This is the 39th consecutive month of outflows from UK equity funds, which shows that the improving commentary on the UK has not translated into investor enthusiasm,” Charles Hall, head of research at Peel Hunt told City A.M.

“This demonstrates the importance of substantive change to address demand for UK assets, with initiatives such as pension reform and a UK ISA central to changing the trend,” Hall added.

“If we don’t reverse fund flows, we have to expect many more bids for UK assets given current valuation levels.”

However, Darius Mcdermott, managing director of Fundcalibre, argued that “these flows look resilient against the wider market backdrop”, as the poor numbers should be seen in the context of a wider pullback from equities by investors due to the market turmoil at the start of the month.

“Upward revisions to UK economic forecasts, strong corporate earnings, healthy consumer spending, and rate cuts on the horizon are all good indications that UK equities are about to come out of the shadows,” he added.

Total money flowing into equity funds fell by more than three-quarters in August to £545m, its lowest level since November 2023.

This was kept in the black entirely by flows into global equity funds and North American equity funds, which totalled £639m and £564m, respectively.

Even with their seemingly impressive numbers, flows into global equity funds fell by 35 per cent from July, and they halved for North American funds.

Similar reductions were seen for flows into European-focused funds, which dropping 58 per cent to £155m, while emerging market fund flows dropped 59 per cent to £174m.

Meanwhile, Asia-Pacific funds suffered a 16th consecutive month of outflows, almost quadrupling from July to £184m in money pulled out.

The poor performance followed the market turmoil at the start of August, as fears over a US recession and a poor Japanese economy exploded, with major global markets dropping double digits over the course of a few days.

“In the first three days of the month, equity fund trading volumes across our network spiked by around a third as nervous sellers took flight while opportunistic buyers simultaneously took the plunge,” said Edward Glyn, head of global markets at Calastone.

While the markets eventually recovered, Glyn said that “nerves have clearly been rattled” as investors continued to sit on the sidelines in the second half of the month.

So, are these numbers as bad as they seem for the UK in this context? Maybe not.

“While no longer trading in extreme bargain territory, investors have started to recognise the value in UK stocks – characterised by the big disconnect in private and listed valuations across the market cap spectrum,” Mcdermott added.

“When this market moves, it moves quickly,” he added.