While numerous surveys point to a rising interest in non-financial outcomes, such as values-based investments—particularly among younger investors—and with many institutions, such as pension funds, contractually committed to some form of sustainable strategy, SDR funds have struggled to attract assets.

Total net assets for all SDR funds in January 2025 were £46.77bn (July: £41.73bn). Outflows over the year to end-July were (-£3.51bn). For non-SDR funds the same Lipper classifications, those figures were (£1,628.64bn and -£34.47bn).

Over the period, then, redemptions from all SDR funds comprised 7.5% of the funds’ January 2025 value, while for conventional funds in the sector, while there were net redemptions, that percentage was 2.12%.

Broken down at the level of SDR label gives the following picture:

Table 1: Year-to-date SDR fund flows and net assets versus aggregate non-SDR equivalents (GBP m)

Source: LSEG Lipper

Sustainability Mixed Goals are the only SDR flag in the black overall, and these funds are confined to the Mixed Asset GBP Aggressive and Balanced Lipper classifications. On the other hand, while Sustainability Focus and Improvers outflows are broadly in line with the market direction where they are invested, Impact funds have suffered most.

In absolute terms, the classifications with the largest redemptions over the first seven months of the year were Equity UK, Sustainability Focus (-£899m, -18.18%) and Equity Global, Sustainability Focus (-£660m, -6.06%). All categories of these two classifications, including conventional funds, have seen redemptions over the period.

On the plus side, Bond Global GBP, Sustainability Impact, funds saw inflows of 14.86% of their January values to July (and Bond Global GBP, Sustainability Focus, 12.78%, both totalling inflows of £57m), and Mixed Asset GBP Balanced, Sustainability Mixed Goals, 14.77%.

The largest outflows as a percentage of total net assets in sectors with £50m or more TNA were from Equity Theme – Alternative Energy, Sustainability Focus funds, which shed 55.17% of their assets (and Equity Theme – Alternative Energy, Sustainability Impact, -30.65%, both totalling -£344m); followed by Absolute Return Bond GBP, Sustainability Focus, with redemptions of 38.98%.

The outflows for Alternative Energy funds are not especially surprising, given performance. Over three years, the classification’s non-SDR funds returned -28.98%, outperformed by both their Sustainability Focus (-26.45%) and Sustainability Impact (-1.52%) equivalents.

In general, however, SDR funds are more likely to have underperformed their non-SDR equivalents over both one and three years. But these are averages: looking at the specific share-class level can sometimes show that an outperforming fund is taking in money, while an underperforming one is shedding it, but more so, thus skewing the average.

Performance may therefore have an impact. Cost, however, isn’t a deterrent. The average total expense ratio for SDR funds was 0.7%, compared to 0.96% for their aggregate classification averages. In only two SDR classifications within the 22 Lipper Global Classifications with SDR funds were TERs higher than the average.

That SDR funds should in general be cheaper is not surprising: they are newer than their conventional peers, and new funds tend to be cheaper, as competition, particularly from passive funds, squeezes costs. Also, fund management companies generally wish to attract investors to new offerings with competitive pricing.

This cheapness may paradoxically explain SDR funds’ lack of traction: if asset managers are not making up in scale for what they are conceding in price, they are effectively cannibalising their own revenues. Why therefore continue to promote funds that undercut your main product offerings, if they are not bringing in new money?

Regulatory complexity has been cited by investment firms as a reason for slower uptake, something that the FCA acknowledges, and will be simplifying disclosure as a result. The pause in determining when and how SDR will be applied to managed portfolio services, however, is potentially causing wealth managers to wait and see.

In short, there doesn’t seem to be a single factor driving SDR redemptions: it’s a mixture of underperformance, unpopular classifications, while some funds may be seeing redemptions because they are just too small… and factor (or factors) “x”, which can’t be explained by the data alone.

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