UK equities are still deeply unloved—indeed, they are becoming more so.

Global outflows from Equity UK, Equity UK Income, and Equity UK Small & Mid Cap funds for the first half of the year were £11.3bn. Lest we ascribe this to the effects of the bear market conditions hammering global equities this year, Equity Global funds have taking in £31.3bn over the same period.

Pariah Asset Class

UK equities have been a pariah asset class for years. UK equity funds have only seen five years of net inflows in the past 15 years. In 2018, the influential global fund manager survey published by Bank of America Merrill Lynch reported that they were the most unpopular asset class: “Worse than cash,” stated one journal: “There has been reported indiscriminate foreign selling of UK shares as investors have exited in favor of … well, anything that isn’t a UK equity”.

The year of the Brexit referendum—2016—saw outflows of £12.3bn, only topped by last year’s £17.4bn of outflows. If the first half figures are anything to go by, this year will be even grimmer for the asset class.

Which is, on balance, rather peculiar. Equity UK funds are down 10.5% over the first half of the year. That’s not a return over which anyone would rejoice, but it looks pretty good when compared to other developed market classifications: Europe ex UK, -17.7%; Global, -13.8%; Japan, -12.7% and US at -13.5%. The market’s relative outperformance has pulled back somewhat over the past month as the energy stocks that supported it have taken a pounding, but overall it’s been a good equity play over this year.

Chart 1: FTSE All-Share out and under-performance (%)
v MSCI World ex UK

Source: Refinitiv Lipper

Over the past decade, investors’ reticence has been understandable, as the UK’s outperformance of global markets has been as infrequent as it’s inflows (chart 2). But, that said, recent history is a bit of a puzzle: as the drivers for British equities’ miserable relative performance are thrown into reverse, outflows actually accelerated (chart 2).

What’s an equity market got to do to get some attention around here?

Chart 2: UK Equity Fund Classification Flows (£bn)

Source: Refinitiv Lipper

Chart 3: UK Equity Fund Flows from Non-Domestic Investors (£bn)

Source: Refinitiv Lipper

No Profit Accepted at Home

Some explanation might be found in chart 3. This is the money going into all UK equity funds globally, minus that going to the UK registered for sale funds with a sterling currency of record—the latter being the best proxy for UK investor funds. This shows that non-domestic investors put money back into UK funds in both 2020 and 2021, perhaps seeing valuation opportunities finally arising from persistent underperformance. What is interesting is the absence of bandwagon jumping this year, with net flows negative again, particularly with small and mid caps (-£228m for HY21).

It has therefore UK investors who have in the main been dumping UK equities, in contrast to the behavior of their international peers. This has been encouraged over the past decade by the availability of better opportunities elsewhere. Another factor is likely the historic overweight to domestic assets UK investors have carried with them, since the days before anyone thought to put the word ‘Bubble’ after ‘South Sea’, and which has been progressively trimmed for much of this century (-£37.1bn).

So, rather than attract cash, it looks like domestic equities’ time in the sun has instead spurred investors to get while the getting is (at least relatively) good.

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