Overview

2023

2023 witnessed another challenging year for the UK funds market, with net retail outflows of £24.3 billion, only slightly down on the record outflow of £26.9 billion in 2022. Equity funds made up the majority of outflows at -£22.4 billion, of which £13.6 billion was from UK equities.

Despite outflows through the year, funds under management rose by 4% in 2023 driven by asset appreciation. This compares with a 14% drop in 2022 as rising interest rates hit asset values. While 2022’s outflows occurred during challenging performance conditions, fund performance in 2023 was broadly positive, indicating outflows were instead driven by a combination of uncertainty and increased rates on cash drawing assets away from funds. Cash ISAs saw record inflows of £47.2 billion in 2023, higher than the previous 8 years combined, as rates on new cash ISAs climbed as high as 5.35% in October.

UK investors maintained a continued preference for index trackers through 2023, with inflows of £13.8 billion to index tracking funds, while £38.1 billion was pulled from active funds. Actively managed equity bore the brunt of 2023’s outflows with £31.1 billion withdrawn. This was only partially offset by inflows of £8.7 billion into equity trackers as net outflows from equities reached £22.4 billion.

UK equity funds continued to see outflows accelerate even as equity outflows began to soften in the last quarter of 2023. Following record outflows of £12.0 billion in 2022, net retail outflows from UK equity funds increased to a fresh record of £13.6 billion in 2023.

Fixed income funds saw inflows through 2023, though muted at just £720 million. Investors strongly preferred fixed income with low credit risk favouring UK Gilts and other Government Bond sectors, which took in a net £4.6 billion over the year. This suggests a level of caution among investors, though improved yields compared to historic levels may have drawn investors in.

Mixed asset funds saw outflows of £4.0 billion through 2023, as outflows from the balanced funds of the 20-60% Shares sector combined with weak sales and intermittent outflows from the 40-85% Shares sector. In contrast, sales remained steady to the Volatility Managed sector which took in a net £2.7 billion to place as the best-selling sector for 2023.

Money market funds were the best-selling asset class through 2023, with inflows of £2.2 billion. These funds are broadly used as a cash equivalent by retail investors, with low volatility and similar performance to cash. They can also be used in a more sophisticated way by advisers and DFMs acting on behalf of investors in times of market uncertainty where investment strategists are waiting for their next tactical opportunity and want to retain a highly liquid portion of the portfolio. For this reason money market funds have a volatile sales pattern and flows for these funds are not driven by the same factors as other asset classes. The pattern of sales to money market funds is in line with the IA’s historic flow data and their status as the asset class best-selling also reflects the substantial outflows from other asset classes.

Responsible investment funds saw consistent outflows over the second half of 2023 with £2.6 billion pulled by retail investors for a total outflow through the year of £3.0 billion. Outflows from Responsible Investment funds contrast with strong inflows in 2020 and 2021 of £11.7 billion and £15.9 billion. Investor attitudes to responsible and sustainable investing may be coloured by poorer performance of sustainable investments through 2022 when oil and gas stocks performed well, industries that are typically screened out by responsible and sustainable funds. Responsible investment strategies are also predominantly (62%) equity, with a smaller proportion of FUM (15%) in fixed income strategies, which did better overall in 2023.

First Quarter 2024

Outflows eased to £3.3 billion in the first quarter of 2024 from £8.6 billion in the last quarter of 2023. aided by inflows of £446 million in March, the first since April 2023. The softening of outflows was driven by reduced equity outflows, particularly in comparison with 2023.

FUM climbed 11% from the end of October 2023 to the end of March 2024, largely driven by improved equity performance. The continuing market rally was fuelled by optimism that inflation was coming under control and that central banks would be able to cut interest rates early in 2024. However, expectations that central banks will cut rates imminently have since proved to be too optimistic.

Inflation is approaching target in the UK and annual CPI has fallen to 2.3% in May. and as we move through 2024, investors are becoming more confident that inflation is stabilising. Investors are also well sighted on the cautious approach from Central Banks to rate setting, which means that any rate cuts are likely to be incremental rather than dramatic in 2024 – markets have been less successful at gauging the timing of rate cuts, however. The market shocks of February 2022 haven’t been repeated and although we have seen a tragic war in the Middle East in 2024, the impact on the performance of markets has been negligible compared with the beginning of the Russia Ukraine war.

The long-term trend to favouring passive investing strategies has continued into Q1 2024, with inflows of £6.6 billion into index trackers and £10.0 billion of outflows from active funds.

Investor sentiment towards equity funds has become more favourable with net retail outflows dropping to £1.6 billion in Q1, from £5.9 billion in Q4 2023. UK equities remained the primary drag in Q1 through withdrawals of £3.4 billion. US equities are the net gainers as North American equity funds saw inflows of £625 million in Q1, entirely to index trackers. This is a mature and well researched market and US equity index trackers have long been favoured by investors over active funds. The US has benefited from stronger growth. the magnificent seven mega cap technology stocks continue to perform well and the US stock market is underpinned by a robust tech sector.

Indian equity funds having enjoyed consistent inflows and strong performance in 2023 saw inflows accelerate to record levels of £388 million in the first quarter of 2024. Consistent inflows to Indian equity funds have come as Chinese equity funds have suffered steady outflows for 14 consecutive months. Q1’s outflow of £119 million comes after a period of poor performance for Chinese stocks and investor wariness over the outlook for growth for the Chinese economy compared with the period pre-pandemic.

More negatively, steady outflows from UK equity funds have continued through Q1 2024, with retail investors pulling a net £3.4 billion. Sustained outflows from UK equity continue the pattern of the previous 8 years. Arguably UK company valuations are cheap, which might be a buying signal to some and has led to M&A interest in UK listed companies such as Anglo American and the distribution arm of Royal Mail but in equities, investors continue to allocate outside the UK in 2024 to US and global equity funds.

In the fixed income space investors, shifted their preference from government bonds in 2023 to corporate bonds in Q1 2024. Bond yields have stabilised after surging in 2022, corporate bonds remain relatively cheap as the price of bonds move inversely to the yield but as cuts to the base rate from the major central banks seem certain at some point in 2024, bond yields are almost certainly going to fall and prices will therefore rise driving up returns. Retail investors placed a net £1.2 billion into corporate debt funds in Q1, against just £41 million through 2023. With expectations that interest rates will be cut later in the year, the risk of default will also reduce for corporate debt.

Responsible Investment funds remained in outflow through the first quarter, though withdrawals showed some signs of softening as investors pulled £725 million over the quarter, compared with £1.4 billion in the final quarter of 2023.