The UK asset management industry suffered its worst year on record in 2022 with net fund outflows surging to £50.1bn as soaring inflation and the cost of living crisis forced retail investors to raid their investment pots.
Retail investors took £25.7bn out of funds last year, the first time that an annual outflow for this group has been recorded by the Investment Association, the trade body which has data stretching back to 2002.
“The scale of the outflows is eye-watering,” said Emma Wall, head of investment analysis and research at the fund supermarket Hargreaves Lansdown.
Just under £12bn of the withdrawals by retail investors came from funds that invest in UK equities, reflecting the gloomy outlook for the British economy which is set to endure a lengthy recession, according to the Bank of England’s forecasts.
Net retail sales of UK equity funds have been negative every year since the Brexit referendum in 2016, with cumulative outflows reaching £33.6bn since then.
Laith Khalaf, head of investment analysis at the fund platform AJ Bell, said 2022 was “a calamitous year for the UK’s fund management industry with money flying out of the door”.
The exodus by retail investors was compounded by a retreat by institutional players who pulled £24.4bn from UK-based funds last year, taking their cumulative withdrawals since the start of 2016 to £16.2bn.
“The rot is now so deeply entrenched in UK fund sales that it is difficult to see this trend reversing in any significant way,” said Khalaf.
Investment management represents a key source of export earnings, tax revenues and high quality jobs for the UK but the outlook for the sector has deteriorated. Big falls across financial markets last year combined with investor outflows and spiralling costs will force asset management chiefs to consider unpalatable decisions about job cuts.
Asset managers are pleading with clients to ignore the economic gloom, pointing out that the FTSE 100 has made a positive start to the year to move within striking distance of its all-time high reached in May 2018.
“The outlook for the FTSE 100 is pretty positive. Just a fifth of the FTSE 100 revenues are from the UK, due largely to banks and supermarkets,” said Ben Kumar, head of equity strategy at the wealth manager 7IM.
Valuations for UK equities, which are trading on a price to earnings multiple of around 10.8 times for 2023, look attractive relative to history and other stock markets, according to analysts.
All of the UK’s main stock market sectors are trading on lower valuation multiples than their global peers, said Michael Stiasny, head of UK equities at M&G Investments.
“The UK has definitely been unloved by global investors but some of the biggest players are taking a look as the FTSE 100 is reasonably priced and the FTSE 250 is cheap compared with 12 months ago. The fund withdrawals by UK retail investors mean they run the risk of missing out,” he said.
Alex Wright, who oversees £4bn in Fidelity’s Special Situations and Special Values funds, said that although the outlook for the UK consumer looked bleak, there were still “good opportunities for attractive returns from UK stocks in the next three to five years”.
“The UK stock market with its higher dividends offers a better prospective return than from many other asset classes, including global equities,” said Wright.
The FTSE 100 currently yields 3.5 per cent and UK companies paid out £94.3bn in dividends in 2022, an increase of 8 per cent on the previous year, according to Link Group, the fund administrator.
JPMorgan upgraded the UK stock market to a buy in November for the first time in six years.
“The UK is still trading at a record [valuation] discount against other regions and it offers the highest dividend yield globally,” said Mislav Matejka, a strategist at JPMorgan in London.