At what point does the mass withdrawal of funds from UK equities become something akin to a crisis of confidence?
So far, the word crisis has not been used too frequently in this context.
Amid the wider political climate, it is refreshing that asset managers, trade bodies and investors have not been too hasty with their language.
But some plain figures show that, should the trend since the referendum continue in the same vein or accelerate, the regulator and even the government might need to consider what steps, if any, might help stem the outflow.
British savers have pulled £11.4bn from UK equity sectors since June 2016, according to the Investment Association.
The association’s data also shows that during February alone, retail investors withdrew £236m from UK equity funds, and the average net retail outflows from UK equity funds since the Brexit vote are around £345m a month.
The IA has been one of many voices calling on the government for certainty, to at least decelerate the trend.
It is not an exaggeration to say the IA’s figures reflect material damage. Lobbying aside, alarm bells were ringing out long before the association’s most recent data.
Back in December 2018 (a long time in modern politics), when retail investors withdrew £315m from property funds, the Financial Conduct Authority began daily monitoring of outflows from funds available to individual investors.
The great suppression
Asset managers, advisers and investors all have plenty of evidence to illustrate the cascading effect of outflows. But they also believe this opens up options.
Chris St John, portfolio manager at Axa Investment Managers, says withdrawals have been significant since June 2016 as allocators have increasingly allocated assets to global equity funds.
“As a consequence,” he adds, “UK valuations remain depressed relative to their own history, reaching a 30 per cent discount and 30-year nadir compared with global equities.
“UK equities remain unloved and underowned, but we believe this presents opportunities for investors. While politicians dither, many UK listed companies continue to combine their earnings, cash flows and dividends.”
But there remains a question over prospects for fixed income investments, which Nicolas Trindade, portfolio manager at Axa Investment Managers, seeks to answer.
“We expect the appetite for sterling fixed income assets over the long term to remain appropriate despite the political situation, as UK insurers and pension funds have a natural demand for domestic fixed income assets.”
Mr Trindade believes the main risk lies with foreign investors who may reduce sterling fixed income holdings further, should the political situation deteriorate.
He adds: “In the meantime, the appetite remains healthy as highlighted by the strong demand for new bond issues from UK retailers.”
Industry views are therefore by no means a consensus of pessimism, particularly as retail might have been perceived as an unloved sector.
Stuart Clark, portfolio manager at Quilter, is also fairly sanguine about the outlook.
He believes there is a buyer strike on UK assets and agrees that equities are underowned.
He adds: “Business investment has been suppressed and while inventory building has provided some short-term buoyancy, most firms are still presenting a very cautious outlook.
“That’s discouraging a lot of potential investors who might otherwise be attracted to the UK.”
Putting Brexit to one side, Mr Clark highlights the economic factors of strong employment figures and scope for upward wage pressure on consumer demand.
He says: “There’s a point where reasonably healthy economic data, combined with attractive valuations, does give investors cause to believe there may be a buying opportunity in UK equities.”
The ground view
Taking a temperature check from advisers, there is no sense that a crisis of confidence is rife.
Alistair Cunningham, financial planning director at Wingate Financial Planning, explains that as the company principally allocates assets strategically, he has not seen any significant shift in the recent past, though he acknowledged a small reduction to UK equity holdings since 2016.
He adds: “Uncertainty may be part of the broader change, as while the UK outlook may not necessarily be worse, the very good and very bad outcomes would seem to be wider, without the commensurate payoff in terms of anticipated returns.”
Ricky Chan, director at IFS Wealth & Pensions, however, says there has been an outflow from corporate bonds in recent months.
“Since October 2018, there has been six consecutive months of outflows totalling £1.8bn, and a large spike in outflows in UK gilts in February, of £110m.”
If the UK/EU deal is secured, which results in better forecasted long-term prospects, Mr Chan thinks investors would find UK opportunities.
While he has also seen corporations relocating headquarters abroad, Chan adds: “I’m sure outflows will reverse as markets have always gone in cycles.”
Market impact
More recently the industry has begun to seen a tangible impact on trading announcements.
In an April update, Premier Asset Management’s chief executive Mike O’Shea said: “Notwithstanding net outflows for the industry as a whole, it is encouraging to note that support for our multi-asset funds remained positive during this more difficult period, with net inflows of £125m over the six months.
“We did however experience net outflows from our UK equity funds, a sector which has been out of favour for some months.”
But the wider story is not all about confidence drying up.
The multi-manager investment team at BMO Asset Management told Financial Adviser’s sister publication FTAdviser in April it has been buying funds run by managers who are happy to invest in UK domestic shares, rather than in international-earning companies.
One of BMO’s moves was for the £1.1bn Man GLG UK Undervalued Assets fund, managed by Henry Dixon.
The fund has a robust track record – it is ranked fifth out of more than 200 funds in the sector during the past three years.
Perhaps BMO’s example shows the UK is currently trading at an enticing discount, compared with other developed markets, and there could be opportunities if the appetite is there.
Key Points
- British savers have pulled £11.4bn from UK equity sectors since June 2016
- UK valuations are depressed relative to their own history
- There is no evidence that there is a crisis of confidence
While confidence is draining, investors are eyeing up equities with an underlying strength, and the perception that any weakened impact is due to the political context – not of certain companies’ own making.
Research from Aegon illustrates divided views among advisers on UK equities, with 14 per cent expecting the asset class to perform the worst, while 20 per cent expect it to perform the best over the next year.
Other advisers are at various viewpoints on the spectrum.
Everyone wants to know, sooner rather than later, who has turned out to be right or wrong on their UK equity moves since 2016.
Marcel Le Gouais is a freelance journalist
