'No Quick Fix' for UK Equity Fund Outflows

Pension funds and Brexit are major factors in the outflow of money from UK equity funds, Morningstar’s Europe market strategist says

Michael Field, CFA 24 May, 2023 | 9:04AM
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Yesterday’s fund flow data showed UK equity categories remain unloved by investors. So what is happening to UK equity funds' asset flows? Here are a few observations.

1. Flows have been entirely negative for the last straight 12 months;

2. Over the last two years there have only been two months which have seen inflows;

3. Net assets have increased since 2007. However, this is down to the natural increase in the value of the underlying stocks. Outflows have been overwhelmingly negative over this period, with asset values actually peaking in August of 2021 and since declining materially.

Why is This Happening?

One major factor is pension funds. For years UK-based pension funds invested a disproportionate amount of assets in UK equities, given their geographical home-country bias, as well as the reputation of UK companies for paying dividends. Between 1997 and 2001, however, UK pension funds reduced their exposure to UK equities from more than half of their assets, to just 6%. That's according to the think tank New Financial. 

Such a huge fall begs the question: was the original allocation too high, or is the new allocation too low? Well, as per the Morningstar Global Markets index, the UK represents just over 4% of the global equity market, so it seems as though the current allocation by pension funds is still generous.

Withdrawals by pension funds are clearly the main explanatory factor here. But there are others. The ageing of equities in the FTSE 100, and the lack of new entrants, particularly in the tech and biotech space, have made the index less attractive to growth investors.

Brexit and a lack of a stable government has also hurt us. Why would investors put more money into a country that has gone through five prime ministers over the past eight years, and where there is a lack of clarity for businesses in the UK and trading with the EU?

What Can Be Done?

The reversal of pension outflows won’t happen. That ship has sailed. There are no quick fixes.

A stable government, be it a Labour, Conservative, or coalition project, will help at the margins, as would a simplification of the listing process for companies. The latter could certainly help attract new firms to the main indices.

Really, however, the long-term strategy should be focused on helping home-grown start-ups in growth areas like tech and medtech, and supporting them from their earliest moments through to listing and capital raising. This, however, takes many years – and capital.

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Michael Field, CFA

Michael Field, CFA  Michael Field is Morningstar's European Equity Strategist

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