After two months of inflows, UK equity funds suffered hefty redemptions in the month of August despite the Investment Association (IA) reporting record total inflows for the month.
According to the IA, while a net £5.3bn ($7.22bn, €6.25bn) was ploughed into retail funds in August, investors either lost faith in, or took profits in domestic equities, as UK-invested funds suffered outflows totalling £445m.
Instead, the preference remained largely for globally-invested funds, with the IA Global sector topped the sector rankings for a sixth month in a row with net inflows totalling £838m. US funds also saw a surge in demand, with the IA North America sector seeing inflows of £122m, up from £19m in July.
“August looked like a return to the previous trend with UK equities well out of favour and investors once again looking to growth, the US and technology,” said Ryan Hughes, head of active of portfolios at AJ Bell Investors.
“The lack of interest in UK equities is interesting as it goes against what we are seeing from professional investors with private equity firms crawling all over UK equities looking for bargains and, in many cases, finding them as we saw with the scramble for Morrison’s,” he added.
For Hughes, the UK market remains significantly undervalued versus global peers and, should this inflationary period prove to be more than just transitory, and central banks are forced to raise interest rates sooner than expected, he argued the FTSE 100 – with its miners and oil stocks -might arguably be better placed than the S&P 500 “which is full of long duration technology companies”.
“Right now, with significant global uncertainty, the range of outcomes is wide and as a result, it feels appropriate to be pretty diversified across portfolios and not look to be a hero trying to call how the current situation pans out,” he said.
Timing
Chris Metcalfe, investment and managing director at Iboss, does not believe now is the right time to be pulling money from UK equities.
“Since the end of October 2020, investors have been handsomely rewarded for investing in any of the IA UK sectors when compared with the global sector,” he said.
Indeed, according to figures from FE Analytics, over this time period the IA UK Smaller Companies Index is up over 44%, nearly double the return of the IA Global sector which increased 22.5%.
Despite these rises, Metcalfe said parts of the FTSE are trading at similar multiples to many other developed market equities, meaning that the FTSE might optically look undervalued, but it’s rather more sector specific.
“The behemoth sectors of banks and energy do still remain relatively cheap, which has the effect of bringing down the overall multiple for the index,” he said. “Our view at the end of 2020 was for oil to go over $100 (£73, €85) a barrel and that remains our opinion, but we have yet to see a corresponding increase in equities such as Shell and BP that we believe will come through in the coming months.”
He added that Iboss doesn’t perceive elevated oil prices to be transitory, but rather a structural move upwards which will last for several years.
“Underinvestment in the commodities supplying the energy needed for the next decade will be supportive of underlying prices,” Metcalfe said. “The pursual of an ESG agenda by governments and many citizens alike cannot get away from the supply and demand equation.”
Transition
Meanwhile, looking at the other big theme affecting UK equities, Metcalfe said Iboss sees inflation pressures and interest rate pressure in the UK as being anything but transitory. He argued that even small moves in rates will help the banks balance sheets which have been under pressure for many years in the lower for longer interest rate world.
He said: “The UK looks a prime market to invest in to capture the twin themes of higher rates and commodity supply and demand dynamics.”
Commenting on the first-time retail fund sales exceeded £5bn in the month of August, Chris Cummings, chief executive of the IA, noted that investors have now channelled £14.5bn into funds from June to August “as rising inflation combined with low interest rates continues to make funds attractive for savers”.
“Responsible investment funds have consistently captured the interest of UK savers, who invested over £1bn for the seventh consecutive month,” he added. “UK investors are maintaining their commitment to deploying their capital for environmental and social good as well as seeking a financial return.
“In the run-up to the COP26 climate conference in Glasgow, and as the UK government commits to generating 100% of electricity from renewables by 2035, investors can play an important role in helping to support the transition to net zero.”
