Since leaving the European Union, investors have pulled almost £100 bn from UK equity funds, raising questions over London’s lacklustre IPO market and the city’s position as Europe’s leading finance centre.
According to data from Morningstar to the end of December 2024, £97.4 bn has been taken from UK-focused funds in the wake of the EU referendum vote in June 2016 — an event often blamed for increasing political uncertainty and exacerbating UK fund outflows.
Head of research at Peel Hunt, Charles Hall said: “It definitely should be a wake-up call. We cannot have an effective equity market without fund inflows, which are essential to enable companies to raise growth capital and to support IPOs.” UK equities have remained out of favour for years, with institutional investors in particular slashing their allocation to domestic companies to a record low over the past twenty years. Morningstar data shows £16 bn was withdrawn from UK equity funds in 2024, although that figure is down on the record £29.9 bn pulled in 2023.
Despite the FTSE 100 notching a record high last month, Hall added that mounting equity fund outflows were having a negative impact on UK company valuations and increased their attractiveness as acquisition targets.
“All of this is materially undermining the UK’s growth potential,” said Hall. “We have a crazy situation where we have significant tax benefits in pensions and ISAs and no requirement to support UK companies. We also have a tax on share trading that makes the UK uncompetitive and an unattractive market for both domestic and oversea’s investor’s.” Several measures have been introduced to boost investment in domestic companies, including one of the biggest overhauls to the UK’s listing regime in three decades. Chief investment officer at Forvis Mazars, Ben Seager, said Brexit was not the only contributing factor to mounting UK equity fund outflows. He added: “Historically a lot of investing has had a home market bias, with investors favouring domestic names that they recognise.” “In recent years this has shifted to a preference for more of a global mindset and taking advantage of the much greater opportunity. Combine that with the period of US exceptionalism we’ve seen over the last decade and the global dominance of US mega-cap technology in the last few years and the shift in flows makes more sense.” The US stock market has continued to attract big investment from retail and institutional investors and has delivered more than 80 per cent over the past five years compared to around 17 per cent for the FTSE 100.
“Over the past 18 months, the market has been very S&P focused,” said David Cummings, head of UK equities at Newton Investment Management. “The S&P has been very tough to beat; and momentum and flow tends to go with the winning index.” He said the UK was “overdue a decent year” and a pullback in the US stock market could catalyse improvements in UK equity fund flows.
“The US market is expensive relative to the UK and Europe. The elastic has been stretched quite wide,” he said. “Sentiment in the UK is pretty negative. The government got off to a tricky start and the market priced that in. Lower rates and lower inflation could help, but you have to wait for the turn.” Other stockpickers are optimistic about the long-term outlook for UK companies and increased investor appetite.
“Despite their improved performance over recent years, UK equities still look cheap relative to other markets and reasonable on an absolute basis,” said Fidelity International fund manager Alex Wright.
“Although the UK market continues to remain largely unloved by domestic investors, its attractive valuations are being recognised by other market participants such as overseas corporates and private equity firms who have been amongst the biggest bidders in the UK market.”
The writer is our foreign correspondent based in the UK
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