Over the past couple of months, Morningstar has recorded significant outflows from UK-domiciled funds multiple times. This month we note a new record as investors withdrew £11.25 billion – the biggest outflow in 10 years.
Equity funds alone accounted for £8 billion of the total, eclipsing last month’s (then record-high) £5.2 billion. With the latest outflows, the broad equity category has now seen redemptions of over £25 billion over the past 12 months.
And the category wasn’t the only one unpopular with investors. Every single group saw outflows in September, even fixed income (£659 million), which has been the most popular over recent month, and allocation (£1 billion), which was an investor favourite over the pandemic. This is the first time all mainstream asset classes have had outflows in unison.
Within equities, US large-cap blend was the least popular category, with £1.60 billion in net redemptions. This was closely followed by UK large-caps, at £1.59 billion, and the two had the biggest outflows of any Morningstar category.
Despite equities’ misfortunes, the two individual funds with the largest outflows sit in the fixed income category. Royal London Short Term Fixed Income and BlackRock Absolute Return Bond saw outflows of £756 million and £602 million respectively. The next three are all equity tracker funds, though, with outflows around the £400 million mark.
The month wasn’t all doom and gloom though. Some funds did attract investments, and at the top it’s all bonds. Even GBP bond sectors saw inflows despite rising yields. With a £250 million net inflow, iShares UK Gilts All Stocks Index was the most popular, but the overall bearish market sentiment driven by factors like government bond sell-offs and interest rate hikes, have seemingly scared off some investors.
Morningstar’s associate manager research analyst Jack Fletcher-Price says: “from our analysis, it would seem there was a hub of buying after the mini-budget, indicating some investors saw the spike in yields as more comfortable from a valuation standpoint.”
But mostly, it was a dreary month for funds. Active strategies saw £9.9 billion of net outflows across all asset classes.
Even the sustainable fund category, which usually remains popular when all other groups struggle, had a £1.6 billion outflow. That said, more than £25 billion has been invested in sustainable vehicles over the past one year.
When looking at the largest net flows over the past 12 months, growth equity strategies dominated the outflows overall: with the latest numbers taken into account, Baillie Gifford Diversified Growth’s net outflows hit £1.87 billion, and Fundsmith Equity hit 1.66 billion.
On the other hand, Ruffer’s Portfolio and Diversified Return, which have the lowest equity exposure in their history, remained in inflow mode.
That said, Fletcher-Price notes that we cannot be certain that the latest fund withdrawals are the largest ever relative to assets under management, as Morningstar’s conclusive data doesn’t quite stretch back to the depths of the 2008 financial crisis.
“We believe there may have been months in 2008 which saw this level of relative outflows. As an absolute figure, it is more likely this is the largest outflow to date, as the UK Open-Ended total AUM has grown significantly since 2008,” he says.
For context, UK open-ended fund AUM has grown from about £630 billion in 2013 to a peak of about £1,400 billion in December 2021.
“We might expect fund flows in October to better reflect investors’ appetite,” Fletcher-Price continues.
“Despite the possibility of another leg of market falls, we are starting to see more attractive valuations in parts of equities and fixed income. Trying to time an entry point is futile, but this margin of safety is opening up long-term opportunities.”