Cashing out: UK investors were ‘most negative’ last year with exodus from equities

UK investors were the “most negative” of any country in 2023, withdrawing $1.8bn (£1.4bn) from equity funds throughout the year.

Globally, the value of mutual funds rose to $10.7trn throughout 2023, largely due to surging asset prices, undoing the damage done by mass withdrawals in 2021, data from Calastone’s Global Fund Flows report revealed.

The US saw the largest jump in assets, increasing 21 per cent, while Europe saw fund assets climb 16 per cent and the UK 14 per cent.

However, the inflows were driven by investors ramping up their investment in safer bond funds, with $22.2bn of inflows into the funds from a sharp spike at the start of 2023.

In contrast, equities suffered, especially from May onwards, as investors pulled a total of $7.1bn from equity funds in the year.

Calastone’s head of global markets Edward Glyn noted that following 2022’s poor performance, with $13.3bn of withdrawals from equity funds, this was the first year on record with two consecutive years of net outflows for the funds.

UK investors withdrew $1.8bn from the funds, only a fifth of the level from 2022, but still the largest of any region. European investors pulled $1.6bn, a sixth of their 2022 levels.

Index funds were strongly back in favour in 2023, attracting $20.1bn of new cash, while active funds shed $27.2bn.

Environmental, social and governance (ESG) focused funds saw their first withdrawals on record, losing $10.2bn throughout the year, while non-ESG equity funds gained $3bn over 2023.

“Astonishingly, the $51.2bn added to ESG equity funds [between 2020 and 2022] was more than six times the amount of capital invested committed to equity funds without specific ESG commitments over the same period,” said Glyn.

While European investors were the first to turn against ESG, beginning to sell out of sustainable funds from January 2022, Calastone now recorded other regions moving to ditch their ESG holdings.

The UK redeemed $1.2bn of money in ESG funds throughout the year, almost double their withdrawals from their non-ESG counterparts.

“Global stock markets are flirting with the record highs they saw back in 2021 and bond markets have recovered strongly from their Q3 lows as investors increasingly judge that disinflation is now well entrenched in most major economies,” added Glyn.

He noted that looking forward, it seemed passive funds were “once again in the ascendancy”, bringing further pressure on the fees for active managers, while the demographic change among investors was forcing asset managers to shift how they pitch to customers.

“The global economy held up much better in 2023 than many feared, however, and it may well do so again this year,” he said.

“Nevertheless, geopolitical concerns muddy the waters, the global trade disruption in the Red Sea may scupper hopes that inflation is vanquished, while the large number of elections around the world will make it harder for governments to tame their urge to binge on borrowing.”