Investors are withdrawing money from UK funds on a worrying scale, says RUTH SUNDERLAND
- There have been 32 consecutive months of net withdrawals by retail investors
- Savers collected more than £13.5 billion in 2023, which was the worst year on record
- Exodus is terrible for the UK stock market and the wider economy
Ask any fund manager investing in UK shares what his or her biggest problem is, and the answer you’re likely to get is: redemption.
The investment gurus do not seek forgiveness for their sins, financial or otherwise. However, they point to a crisis of confidence in the UK stock market.
Redemption is the technical term for investors who withdraw their money from a fund.
In recent months and years, small savers have made withdrawals from funds investing in UK shares on a worrying scale.
According to the Investment Association, March was the 32nd consecutive month of net withdrawals from UK share funds by UK retail investors.
Highlight: In recent months and years, small savers have made withdrawals from funds investing in UK shares on a worrying scale
Savers took in more than £13.5 billion in 2023, which was the worst year on record, on top of £12 billion the year before.
The exodus is devastating for the UK stock market and the wider economy. This level of redemptions means fund managers do not have the cash to invest in emerging UK companies.
With open-ended funds, they have to tap into resources to give savers their money back.
In order to acquire a new and potentially profitable opportunity, they would have to sell an existing business.
When an opportunistic bidder comes in with a low offer for a UK company, fund managers are under pressure to accept it because they need the money.
Instead of supporting British companies, small investors here are supporting foreign companies, especially in the US.
It happened on a massive scale – in both senses of the word – at Coutts.
The posh private bank used by the royal family has taken more than £2 billion of its customers’ money from the London stock market and moved it abroad. Unpatriotic perhaps, but it’s hard to blame anyone given the respective returns.
As broker AJ Bell puts it, the UK fund industry is ‘going through a dark age’
There is no great mystery about the appeal of the American market.
Savers around the world want to buy into the Magnificent Seven technology stocks: Amazon, Alphabet, Nvidia, Tesla, Meta, Microsoft and Apple.
The flow of money across the Atlantic Ocean is gaining speed.
The amount invested in US equity funds in the last quarter is more than double the £625m that flowed in in the last three months of 2023.
As broker AJ Bell puts it, the UK fund industry is ‘going through a dark age’.
More than £50 billion has been withdrawn from Britain by small savers in the last two years, which is a shock.
The various reforms proposed by the government have come to nothing.
The Great British Isa is a good idea in principle, but on its own it is unlikely to turn the tide.
Bold steps are needed, such as removing stamp duty on share purchases.
Another smart measure would be to increase the minimum contributions for automatic pensions.
These amount to 3 percent of qualifying income for an employee and 5 percent for the employer, which is not nearly enough and should be doubled. That would generate investment capital and give people a better chance of a decent pension.
Labor is trying to exploit the Tories’ loss of credibility in the financial world during the Truss-Kwarteng interlude.
The party has even gone so far as to say in its financial services plan that it will “unapologetically” defend the sector as “one of Britain’s greatest assets”.
We’ll see, but someone has to do it.