UK Equity Funds Suffer Heavy Withdrawals In 2023

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UK investors pulled money out of domestically-focused stocks and shares-based funds for the third year in a row, and for the 31st consecutive month to December last year, Andrew Michael writes.

According to global funds network Calastone’s Fund Flow Index, investors withdrew £8 billion from UK equity funds during 2023, a similar amount to the previous year, marking the third year running where the sector experienced a net outflow of cash.

Despite this, Calastone reported that “UK investors were brimming with confidence” at the end of 2023, with inflows to equity funds as a whole in December surging to £1.2 billion, their best month since April.

However, the year’s late flurry was not enough to prevent equity funds overall from experiencing a net outflow of cash worth £1.24 billion during the course of 2023.

The figures reinforce a feeling of gloom pervading the UK stock market. With a 2023 return of 4%, the FTSE 100 stock index of leading shares significantly lagged its US rival the S&P 500, which was up 25% during the year.

The City of London has also continued to fail to attract corporate flotations, notably that of Arm, the computer chip designer, which floated successfully on the US tech-oriented Nasdaq exchange last September.

Calastone described money market funds as the “big winners” of 2023, attracting as they did a record £4.4 billion of investors’ cash. This figure was more than the sector’s total for the previous eight years.

These funds invest in short-term cash deposits and bonds, aiming to offer a cash-like level of stability and liquidity to investors wary of equity investments, along with higher returns than bank or building society deposits.

In terms of sector high-spots, Calastone said US equity funds enjoyed record inflows last month worth nearly £1 billion. European funds, which experienced net outflows every month between January 2022 to November 2023, reversed that trend by attracting £476 million in December, their second-best month on record.

Funds with an environmental, social and governance (ESG) focus recorded an eighth consecutive month of selling, leaving the sector £2.4 billion worse off than at the start of 2023.

Edward Glyn, head of global markets at Calastone, said: “Money market funds are doing well for two reasons. First, they are a safe haven and, secondly, the yield is often well above what is available for cash on deposit at a bank. So, they are drawing money away from the banking sector that might otherwise have idled in instant access savings.”

Separately, according to a report from the London Stock Exchange Group (LSEG)/Lipper, the majority of actively managed funds and exchange-traded funds globally were unable to beat their respective benchmarks over the course of 2023.

Active fund managers pick the securities that make up their portfolio, usually with the aim of outperforming a stock market index such as the FTSE 100.

Detlef Glow, head of Lipper EMEA research at LSEG, said: “It’s fair to say that 2023 was a year in which active fund managers could have shown their asset allocation and timing skills. In general, the results of this study show that active equity fund managers did not achieve this goal.”

4 January: Hoped-For Post Covid Bounce Fails To Materialise

Investors with China-oriented funds experienced dismal performance in 2023, in stark contrast to those who favoured technology sector portfolios, writes Andrew Michael .

An analysis of fund performance in 2023 has highlighted vastly differing fortunes experienced by the two investment sectors.

Referring to the Investment Association’s universe of 50 investment sectors, representing £8.8 trillion managed by the IA members in the UK, Quilter Cheviot found that 42 of the bottom 43 funds were invested in China.

Bottom of the pile came abrdn’s China A Share Equity fund which, according to Quilter Cheviot and Morningstar data, produced a negative 29.2% return over the course of 2023. The next nine worst-performing funds also came from the China sector, with each one registering losses of more than 25% (see Table 1).

Nick Wood, head of fund research at Quilter Cheviot, said: “China has been left languishing at the bottom in a year when its Covid re-opening was expected to produce attractive returns. Abrdn China A Share Equity found itself at the bottom of the performance rankings, although given 42 of the bottom 43 are China funds, it is clear the country as a whole faced considerable headwinds.”

Table 1: 10 worst performing funds in the IA universe in 2023 FundTotal return (%) calculated in £abrdn China A Share Equity-29.2Wellington All-China Focus Equity-28.3JPM China-27.8FSSA All China-27.4Value Partners China A Shares Equity-27.2Allianz China A-Shares Equity-26.9Redwheel China Equity-26.4abrdn All China Sustainable Equity-26.3Barings China A Share-25.6Templeton China-25.4Source: Morningstar, Quilter Cheviot at 31/12/23

In contrast to the malaise that has affected investors in China, last year turned out to be considerably more profitable for tech investors, with several funds from this sector making it into the top 10 best performing funds across the entire IA universe in 2023 (see Table 2).

Table 2: 10 best performing funds in the IA universe in 2023 FundTotal return (%) calculated in £Nikko AM ARK Disruptive Innovation59.1Liontrust Global Technology58.8T. Rowe Price Global Technology Equity54.4L&G Global Technology Index53.3New Capital US Growth49.8Pictet Robotics46.3Polar Capital Global Technology46.1Pictet Digital45.7JSS Sustainable Equity Tech Disruptors45.5PGIM Jennison US Growth45.5Source: Morningstar, Quilter Cheviot at 31/12/23

The top performer was Nikko AM ARK Disruptive Innovation managed by ARK’s founder, Cathy Wood, a firm that is synonymous with investing in the US. Other managers that produced returns in excess of 50% on the year included Liontrust, T. Rowe Price, and Legal & General.

Quilter’s Nick Wood said: “It is clear technology stocks are very much back in vogue, despite the high interest rates that were supposedly going to hamper them. The ‘Magnificent Seven’ stocks [including Microsoft, Apple and Nvidia] have brought tech funds back to the fore, with the top 10 performers being almost exclusively focused on this sector.

“Clearly the artificial intelligence boom of 2023 has helped to drive these funds up from the doldrums they found themselves in at the beginning of last year and will have rewarded investors who stayed patient and invested through the difficult period.

Mr Wood added that such was the tech sector’s dominance last year, only one non-technology dominated fund, Lazard Japanese Strategic Equity, made it into the top 20 best performers list.