Investors pulled a record £8.38bn from UK equity funds in 2022

Outflows from UK equity funds reached record levels last year as global market turmoil weighed on investor confidence.

Investors pulled £8.38bn from UK-focused equity funds in 2022, with net sales activity each month, the worst year on record for the asset class, according to new data compiled by Calastone.

The findings mean that 2022 marked the second consecutive year of outflows for UK-focused funds, despite the FTSE 100’s relative outperformance over the period compared to global peers.

Edward Glyn, head of global markets at Calastone said: ‘2022 has been a momentous year.

The sudden swing by central banks from an abundance of liquidity and cheap money to a barrage of rate hikes to curb rampant inflation rocked asset markets.

“There is a structural bias in the market for fund inflows as we put money aside in our pensions and ISAs/savings plans, so such a large outflow from equity funds in 2022 without a corresponding increase in other asset classes is a very big vote against . -to trust.’

He added: “Investors have sought the safest havens they can find, seeking refuge in cash and the supposedly lower risk classes of funds.”

According to Calastone’s latest Fund Flow Index, total mutual fund flows in 2022 were the weakest in at least eight years.

Equity funds were the hardest hit, losing £6.29bn over the year, representing three-quarters of Q3 sales volumes.

Within this diverse asset class, some fund sectors, such as UK-focused funds, were hit much harder than others.

UK Focus: Net Flows of UK Focused Equity Funds from 2020 to End of 2022

Equity funds: a chart showing the net flows of all types of equity funds from 2015 to the end of 2022

Elsewhere, investors have unloaded £2.65bn of European funds, a record £1.17bn of North American funds – the first year of outflows since 2016 – and £1bn of Asia-Pacific funds.

However, global funds continued to attract new capital. Investors added a net £4.87bn to global funds, but this was ‘entirely down’ to ESG strategies, according to the report.

It said: ‘Global ESG equity funds attracted £6.35 billion, while funds without an ESG mandate lost £1.48 billion.

Emerging market funds enjoyed £647m inflows, while equity funds had their best year on record for Calastone, reflecting their defensive qualities in times of recession and higher interest rates.

“They still had outflows (-£427m for the year) but this compares to outflows over 10 times greater in both 2020 and 2021 and much larger outflows in 2022 for non-income strategies .’

Passive equity funds have endured a torrid time, seeing their first year of outflows on Calastone’s record and underperforming their active counterparts for a second straight year.

Passive funds lost £4.45bn in 2022, while active vehicles saw a much smaller outflow of £1.82bn despite being much larger in terms of assets under management.

According to the findings, global index funds experienced the largest capital outflows at £3.26 billion, while their active counterparts posted net inflows of £8.13 billion. The popularity of ESG helped bolster net inflows into active funds, the report said.

In November and December, markets started to look a little brighter, in hopes that the cycle of central bank interest rate hikes could be drawing to a close.

Calastone said: ‘This meant a tentative inflow into equity funds in November and December (see table attached), strongly focused on global funds (mainly ESG), but with a modest interest in emerging markets and also equity income. Equity funds saw a total of £381m inflows in December.

However, investors still refused to touch UK-focused equity funds. The outflow in December was £701 million.”

Rising inflation and higher interest rates have also hurt bond prices. Inflows into fixed income funds continued, but at £2.89bn for the year, they were lower than the £7.07bn inflows in 2021, when floor rates drove up bond prices.

Calastone added: ‘Investors were most positive about fixed income in the fourth quarter, with a net increase of £1.67 billion. By then, returns were significantly higher than at the beginning of the year (thanks to falling prices), so new capital from investors in these funds will receive more interest income than at any time in the last 14 years.

The inflow also indicates that investors are beginning to anticipate an end to the rate hike cycle and have positioned themselves for a possible bond market rally. Among other asset classes, mixed asset funds had their worst year on Calastone’s record with inflows of £1.16bn, while real estate funds saw outflows shrink by three quarters to £535m.

Looking ahead, Mr Glyn said: “Sentiment has improved significantly in recent weeks, but there is huge uncertainty about the future path of interest rates and economic growth around the world and we could see the bear market roar once more before the bull market cycle can begin . start over.

However, the expectation that the UK economy will experience its worst recession among major economies has prevented the current burst of optimism from spreading to UK-focused funds.

“It’s tough for the industry. Fund management groups were hit twice: the supply of capital contracted as bond and stock markets fell, and the replenishment rate declined or returned as investors delayed purchases or fled for the safety of cash.

“The resulting reduction in assets under management resulted in a significant drop in revenue. Nevertheless, with more of the pain focused on outflows from index funds, whose fees are lower, there is a trace of silver in the liner for active fund houses.”

Flows: Net fund flows by asset class as set out in Calastone’s latest report