UK-focused equity funds in January saw record outflows last month, despite a host of big names highlighting the value on offer for investors.
Investors sold down a net £795m of UK-focused equity fund holdings last month, according to Calastone's latest Fund Flow Index, which was comfortably bigger than the previous record set in June 2020.
The heaviest days of selling of UK-related funds was on 21 and 24 January, when the FTSE 100 was being heavily sold off, but outflows had steadily build across the whole month from the 4th onwards.
This took the cumulative outflows from UK-focused funds to £2.9bn over eight consecutive months, another record.
But rather than an increase in selling activity, Calastone said the outflows actually reflected a lack of investors buying these UK funds.
Investors are ignoring some high-profile opinions on the attractiveness of the UK stock market, however, with JP Morgan's head of investment last week calling London's shares "exceptionally cheap", while Morgan Stanley’s equity strategists said the Footsie was "one of cheapest global indices by some distance".
UK fund managers have also been highlighting the large 'postcode discount' that LSE shares can be snapped up for, with Rathbone UK Opportunities manager Alexandra Jackson pointing to London stocks currently trading at close to a 30-year low on a price/earnings basis compared to the rest of the world.
Edward Glyn, head of global markets at Calastone, said the outflow from UK equity funds is "extreme in the context of the relatively benign stock market performance" with the UK indices roughly flat for most of January, contrasting with a sharp drop in US share prices.
"Political chaos in the UK may be colouring perceptions, but since this is not reflected in share prices, it is surprising that fund flows are taking a different course."
The Bank of England might have something to do with it, Glyn felt, with interest rates rising off the blocks in the UK faster than anywhere else in the developed world.
But he pointed out that UK equities are less sensitive to rising rates than markets like the US and its preponderance of tech giants.
"It is possible that UK share prices have been supported by a rotation out of higher value stock markets by foreign buyers," he suggested, while UK investors' heavy weighting to equities means that, "in uncertain times when they are more cautious on equities full stop, UK-focused funds feel the greatest impact".
Investor appetite for equity funds focusing away from Britain continued to attract inflows, though they were lower than the previous month, and with Asia-Pacific and European equity funds seeing increased outflows.
Funds focused on international equities attracted the most interest from equity fund fans, with January seeing £998mln of new investment, though this was down from £1.3bn in December.
Fixed income and mixed asset funds also saw inflows fall significantly from the elevated levels seen in December, when investors started to awaken to the rising rate environment.
“The rising interest rate theme is behind the general caution we are seeing across all asset classes which have all benefitted from the ultra-cheap money that has flooded the financial system in recent years," said Glyn.
"This era seems to be coming to an end leaving investors in a quandary on what to do with record levels of savings needing a home. For now, they are accumulating ever more in cash deposits.”