Sales to index trackers continue to dominate

Inflows to index trackers across all asset classes climbed to £13.8 billion in 2023, up from £11.0 billion in 2022 though remaining below the c. £18 billion a year from 2019-2021. Index tracking funds have continually outsold actively managed funds since the end of 2021 and have remained in near continuous inflow, whereas actively managed funds have seen persistent outflows of £86 billion since the beginning of 2022 to the end of March 2024.

The ongoing popularity of index tracking funds forms part of a long-term trend, with the share of the funds market in trackers having more than doubled from 10.5% in 2014 to 22.7% at the end of 2023.

In 2023, inflows to tracker funds were dominated by equity sales of £8.6bn and we reflect on the drivers behind equity tracker sales in the next section.
Fixed income tracker sales were £4.3 bn in 2023. Investor preference for government bonds has also fuelled inflows to trackers as index trackers are heavily represented in the Government Bond sectors (82% of FUM in trackers) and the UK Gilts sector (72% of FUM in trackers).
Mixed asset funds using trackers as building blocks were less popular with investors in 2023 with an outflow of£704 million.

In the first quarter of 2024, index tracking sales have made a strong start with inflows £6.6 bn - equity funds accounted for nearly 80% of sales.

Investors favour index tracking equity over active

The above chart shows that equity outflows have been from active funds and investors have continued to place money into equity trackers over the past 15 months with the notable exception of UK equities. Equity funds make up 64% of tracker FUM.

UK equities: Active UK All Companies funds saw an outflow of £8.6 billion through 2023. Outflows from UK All Companies index trackers were more modest at £1.7 billion. Outflows from UK equities also form part of a long running structural change with an ongoing erosion of home bias. Investors in the UK are increasingly embracing global diversification, with UK equities comprising a smaller portion of total equity funds under management (FUM). However, UK equities still hold a significant weight, accounting for 20% of the equity portion of industry FUM, which remains high when compared with the weighting to the UK of 3.8% in the MSCI World benchmark.

North American equities: Actively managed North America funds saw outflows of £3.3 billion in 2023, almost counteracted by inflows of £3.0 billion to North America Index trackers. The inflows to North American equities in Q1 2024 were almost entirely driven by index trackers, though outflows from North American actively managed funds did dry up. Inflows to North American equities have been boosted by the strength of the US economy, signs of earlier low inflation and a much heavier weighting to technology stocks which saw strong performance in 2023 amidst excitement around the possibilities of Artificial Intelligence. Over 2023 the US Russell 3000 index returned 18.9%, outperforming both Europe (MSCI Europe ex UK – 15.8%) and the UK (FTSE All Share – 7.9%).

Global equities: Global sector index trackers remained popular, with inflows of £4.3 billion through 2023, jumping to £2.4 billion in the first quarter of 2024. Actively managed Global funds saw outflows through the period however, with £4.0 billion net retail outflows.

In a period of weaker economic growth with lower return prospects, investors may be focusing more heavily on controlling the cost of investment as a way of supporting returns by opting for index trackers.

Record outflows of £13.6 billion for UK equities in 2023 present a stark picture, and the influence of adviser and wealth manager re-allocation away from the UK to the US and Global is a clear driver of outflows from the UK. However, our polling of UK investors in March 2024 suggests that individual investor sentiment towards UK companies is not wholly negative. 55% of stocks and shares ISA investors that we polled in March were confident that investing in UK companies would meet their investment goals. Admittedly this was less favourable than the 72% who were confident in investing a diverse range of global companies but was still positive. 62% of the youngest age group of 18-35 year olds were confident in the UK compared with 67% for global companies suggesting the gap in confidence is closer for the young who may not have the wisdom of experience.