Private investors swing towards UK focused funds, away from US

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UK private investors have started to put more money into UK focused funds after six months of outflows, while pulling out of US funds.

In the first quarter of 2021, there was roughly £10bn of net inflows into retail funds, according to the Investment Association (IA).

Global funds were the best-selling sector in March and February, with £1.6bn following £1bn of net retail inflows respectively, making it £3.6bn for the quarter.

With the UK’s vaccine roll out being among the most advanced in the world, confidence returned to UK stocks in March, with £217mln invested by private savers into smaller UK companies and £472mln into funds in the UK All Companies sector, which typically invests in medium to large companies listed on the FTSE.

This was the first such inflow in six months, the IA noted, and follows pretty much five years of the cold shoulder treatment from investors.

Meanwhile, US funds saw around a £1bn outflow in March, according to the IA data.

Overall, March saw £4.4bn of net retail inflow into funds compared to £2.4bn in February, with net institutional outflows of £1.3bn continuing the outflows each month of 2021 so far.

Responsible investment funds also saw a net retail inflow of £1.6bn in March, a new monthly record.

Following continued strong sales in 2021 and net retail inflows of £10bn for the whole of 2020 and £3.2bn in 2019, total funds under management for responsible investment funds stood at £66bn as of the end of March, with an overall share of industry FUM of 4.5%.

Tracker funds also saw more money flowing in, with a positive net retail flow of £626mln in March to lift FUM to £259bn and an overall share of industry FUM of 17.7%, which is down from the 17.8% at the end of last year as the pace of inflows has slowed notably in the last couple of months.

Laith Khalaf, financial analyst at AJ Bell, said: “It’s possible we may be approaching ‘Peak Passive’ in the UK, particularly now that long standing investment trends seem to be showing tentative signs of going into reverse, which should in theory favour a more active approach.”

Looking at the UK and US trends, Khalaf said some of the exits from US funds was likely to be profit-taking, following an incredibly strong run for the US stock market.

“But 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,” he said, though the continued health of global funds suggested investors aren’t totally downbeat on the US, seeing as these funds have a high weighting to the US.

Khalaf said the UK equity fund inflow 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”.

The recent stellar performance of UK’s smaller companies has not gone unnoticed, with Kate Marshall, acting head of investment analysis at Hargreaves Lansdown, saying, “These often fare better when investors are in ‘risk-on’ mode and that’s exactly what we’ve recently seen.”

While the negative flows from institutions since the start of the year is clearly of some concern, as these investors are a huge driver of market prices, Khalaf said: “It wouldn’t be the first time that big money proved itself not to be smart money though. In October of last year, institutional investors withdrew £8.4bn from investment funds, just before the arrival of the Pfizer vaccine provided a big boost to stock markets.”

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