Having seen inflows of close to £2.3bn ($3.25bn, €2.7bn) in 2020, funds invested in US equities witnessed net outflows of £1.6bn in the first quarter of 2021, according to the Investment Association.
The bulk of those outflows took place in March, with the IA revealing investors redeemed a net £1.09bn from the IA North America sector. This made it the second least popular peer group behind Sterling Corporate Bond – which witnessed an outflow of £1.47bn for the month.
While some of this may be a result of profit taking following a very strong run for the US market, Laith Khalaf, financial analyst at AJ Bell Investments, said another factor may also be at work.
“Investors might also be concerned about the prospects for interest rate rises to dent the share prices of the big US tech firms that now make up such a large part of the S&P 500,” said Khalaf.
“This could be a pretty significant turning point, as investors reflect on what’s performed well in the past, and where opportunities lie for the future,” he added. “The global sector continues to attract inflows, so investors aren’t totally downbeat on the US, seeing as these funds have a high weighting to the US, which now makes up around two thirds of the global developed stock market.”
On home soil
Indeed, according to the IA, the Global sector attached a huge inflow of £1.57bn in March, while investors also turned more bullish on UK equities with the IA UK All Companies sector seeing its first positive inflow in six months, attracting £427m for the month.
“UK investors are coming back round to the idea of putting their money to work on home soil, according to the latest industry data,” said Kate Marshall, acting head of investment analysis at Hargreaves Lansdown.
She added: “2020 was a tough year for the UK market, with the coronavirus taking its toll on our lives, both personally and economically, and many parts of the market staying out of favour. 2021 already looks a lot different, with investor sentiment improving on the back of a successful vaccine rollout and the lifting of lockdown restrictions.
“With the economy reopening, many expect to see a splurge in consumer spending and a boost to areas such as retail, banking, and even travel and leisure.”
While most money has gone into larger UK companies, Marshall noted the recent strong performance of some of the UK’s smallest businesses hasn’t gone unnoticed, with the IA UK Smaller Companies seeing a net inflow of £217m for the month.
For Marshall, such a move suggests investors may be in a ‘risk on’ mode, however Khalaf said strong inflows into the mixed asset funds could also indicate that investors were looking to take a little risk off the table.
US comfort blanket
Chris Rush, investment manager at Iboss, said the reversal of fortunes for UK companies began in November last year and in the time period since they have been the best performing geography, closely followed by the Europe, then the US.
“Many US firms were the beneficiaries of working from home culture and the UK didn’t benefit from this tailwind,” said Rush. “The reversals of fortune for many of these working from home companies started in November, which benefitted us as we increased our weighting to the UK prior to this point.”
Rush added that while those investors moving from US to global equities have recognised the issues, he added they have been unwilling to let go of the “US comfort blanket” and the historic performance figures that go alongside that blanket.
“Hence their move to global equities, which, in many cases is as close to a proxy for the US as is possible,” he said.
