Investors have turned their backs on UK funds over the past six months despite them holding up better than their global rivals, with passives and quality-growth managers taking the brunt of the withdrawals.
While the UK market has done well in the first six months of the year (the FTSE All Share index is down 4.5% while the MSCI World index has dropped 8.3%), it hides underlying movements.
In this rotation there have been clear winners and losers. While the FTSE All Share Energy sector is up 20.6% and others such as healthcare and banks have made positive gains, former winners of the past decade (namely technology and consumer discretionary stocks) have plummeted, as the below chart shows.
Total return of indices over YTD
Source: FE Analytics
As such, while the UK has held up comparatively well, quality-growth managers have been on a rollercoaster in the first half of 2022 – one that not all investors have been willing to ride.
The likes of FE fundinfo Alpha Managers Nick Train, Keith Ashworth-Lord, Hugh Yarrow and Anthony Cross and Julian Fosh have all watched as investors have pulled their cash out.
What unites them all is that they are quality-growth stock pickers, meaning they look for businesses that can grow steadily over the long term and will be around in several decades’ time.
This can lead them to technology and consumer discretionary names, the likes of which have made heavy losses so far in 2022.
Indeed, as the below chart shows, these funds all made the top 20 most-sold funds of the first half of 2022.
Source: FE Analytics
More than £500m has been pulled out of the LF Lindsell Train UK Equity fund – the second-most among active funds. Last week the manager apologised for the underperformance, the second time he has done so in the past few months.
TB Evenlode Income, Liontrust Special Situations and CFP SDL UK Buffettology also all cracked the top 20 most sold funds over the first six months of the year.
It is not just a quality-growth problem for investors, however as UK passives have also struggled. While the market itself has performed better than other equity markets out there, investors have broadly been turned off risk-on assets such as stocks thanks to higher inflation and rising interest rates.
This was shown in the latest Calastone data, which revealed equity funds made their worst start to a year on record, while a net £826m was pulled out of UK equity funds, the 12th consecutive month of net outflows from the three Investment Association sectors.
This environment is the antithesis of the past decade, in which low rates and inflation forced many away from the safety of bonds and other assets.
These have now returned to safer havens, with the UK market among the most sold. Indeed, with political uncertainty following Boris Johnson’s resignation and the subsequent leadership battle, uncertainty may remain for some time to come.
A third theme is the decimation of mid-caps, which have taken a hard hit so far this year. The domestic market is home to more domestic names, which have fared worse than their large-cap peers.
Jupiter UK Mid Cap is the standout name here, with £640m or so being pulled from the portfolio in six months, the most of any active fund in the UK All Companies sector.
Turning to the positive side, index funds that focused on the FTSE 100 proved popular as investors moved towards the better-performing end of the market.
Indeed, HSBC FTSE 100 Index was one of four passive funds tracking the UK’s largest index to appear on the top 20 most-bought funds of the year so far.
Source: FE Analytics
Environmental, social and governance (ESG) funds did well despite some of the sector’s largest companies being in the growth camp of stocks.
Despite losses, Royal London Sustainable Leaders Trust and PUTM ACS Sustainable Index UK Equity (which launched in January) attracted inflows in the first six months of the year.
Meanwhile investors allocated to some growth names, such as Liontrust UK Growth and Baillie Gifford UK Equity Alpha, which may be as a result of attempting to buy the dip.
It should be noted, however, that the amount pulled out of the top 20 most sold funds in the first half of 2022 was significantly more than the amount received by the most bought