For investors, there’s typically no place like home. But in a record-breaking period for fund sales, UK equity portfolios have been left unattended by their usual owners.
At a time when domestic stockmarkets continue to rise, and vehicles investing in overseas shares enjoy strong inflows, more than £2.5bn has poured out of the UK All Companies and UK Equity Income sectors. This is in stark contrast to historical data, which shows advisers and investors have, either consciously or unconsciously, favoured domestic stocks when constructing investment portfolios.
Whether this has been due to home turf being more familiar – and hence fostering a greater sense of security – or a plain and simple lack of diversification, is unclear. What is apparent is that many are becoming much more conscious of these biases.
Data from the Investment Association (IA) shows the severity of the UK exodus. According to the latest figures, UK All Companies was the worst-selling sector in five of the first 11 months of 2017, with net retail outflows over the full period of £1.5bn. As Chart 1 shows, almost £1bn left the sector in May and June alone.
Domestic income funds have suffered a similar fate. The UK Equity Income sector witnessed total net outflows of more than £1bn between January and November. This has come during a period where overall fund sales reached record highs, despite an uncertain political and economic backdrop. The IA Global sector, for example, saw net inflows topping £3.6bn, and Europe ex UK funds drew sales of nearly £2.4bn.
According to Jonathan Miller, director, manager research ratings at Morningstar UK, the shift can be pinned on a number of developments.
“Uncertainty on domestic growth, reduced backing for the government, and protracted Brexit negotiations have all been contributing factors,” he says.
The perception that UK indices do not offer the prospects they once did is also responsible. Simon Gibson, chief investment officer at Mattioli Woods, notes: “We are now running with our lowest ever UK allocations, with only circa 9 per cent in geographically focused UK funds, and around one third of this in smaller companies – our preferred area. The main reason is seeing better value on a risk-reward basis elsewhere.”
Mr Gibson adds the firm began cutting its UK weighting three years ago, and data from the IA suggests the UK fund withdrawal is more of a long-term trend than a short-term spike: UK All Companies was the worst net retail selling IA sector in six of the seven years between 2009 and 2016.