The IA UK All Companies sector was the worst-selling Investment Association sector for the fifth consecutive month in May, according to a report published on Thursday.
Last month, the sector experienced a net retail outflow of £182m – which represented a narrowing from the £829m lost in April – and has seen a total outflow of just over £5bn since May last year.
Despite the sector’s lack of popularity, it has performed well over the last year, providing a positive return of 10.81 per cent and outperforming both the IA UK Equity Income and the IA UK Gilts sectors.
As such, assets in the sector have continued to increase despite its stream of outflows. Between April and May alone, the sector has grown from £168.3bn in size to £173.1bn and, since January, has grown by more than £10bn.
Performance of sectors over 1yr
Source: FE Analytics
However, investors are still turning their backs on the UK All Companies sector, and the UK in general, to invest in countries with stronger prospects such as Europe and Japan, according to Apollo’s Ryan Hughes (pictured). 
“The UK market has looked quite expensive for a while and there have been better opportunities elsewhere,” he said. “So people have been focusing on Europe and Japan, for example, rather than the UK, with all of the QE that’s going on there and trying to make some money.”
“There are opportunities being seen further afield and we had the Scottish referendum late last year, the UK election this year – there have been enough risks and headwinds in the UK to force people to think where they should allocate to over the last few months.”
According to the Investment Association’s data, the best-selling sector in May was IA UK Equity Income, which benefitted from net retail sales of £419m.
This would perhaps suggest that investors are still choosing to invest their money in the UK, but are prioritising income over growth.
For many, the combination of high valuations and low yields that bonds are offering have meant that equity income funds are now more appealing due to their ability to pay investors more.
Tilney Bestinvest’s Jason Hollands believes that this, combined with a general sense of nervousness in the market, had led to investors using income as a safety net.
“Income remains in demand but even the UK equity income sector sales have dipped since April,” he pointed out.
“What you’ve seen for some months is a lot of flow going into equity income, a lot of which has actually gone into the Woodford fund over the last year. You’re getting a higher yield on equities than you are on bonds and people are still quite nervous.”
“People are also worried about valuations looking toppy in the UK. Certainly not as overvalued as the US market, for example, but there are questions over whether the market is fully-valued at the moment.”
“Clearly, people are holding these higher-yielding stocks for a reason – they need income. Actually, some of those stocks look quite expensive, but I think it’s more of a case of those who want to stay in equities are allocating to areas like Europe and Japan and those looking for income are looking at equity income funds and property funds.”
With decent yields more of a rarity, it could be that the hunt for income has overshadowed other sectors of the market, including the IA UK All Companies sector.
In an article published last month, Gavin Haynes, managing director of Whitechurch Securities, told FE Trustnet that there are significant opportunities within the UK All Companies sector that shouldn’t be missed.
Examples he gave were Nick Train’s CF Lindsell Train UK Equity fund and Richard Buxton’s Old Mutual UK Alpha fund – both of which have a five FE Crown rating and have outperformed their FTSE All Share benchmark and sector average significantly over five years.
Performance of funds vs sector and benchmark over 5yrs
Source: FE Analytics
If there really are stellar opportunities in the sector, have UK investors simply begun to turn their back on growth?
Patrick Connolly, of Chase de Vere, believes that investors are still interested in growth but broadening the range of sectors within their portfolios.
“I think at the moment there are just general stock market concerns about the fact they’ve gone up a long way and investors have been looking, as much as anything else, at trying to put extra protection in their portfolios at a time when the market has risen a lot over the past few years,” he explained.
“Some of it will be for protection, some of it will be for diversification purposes as well – looking at other areas and looking at other regions where they rightly or wrongly think there might be better prospects.”
However, he believes that investors will buy back into the sector at some point, it’s simply a case of ‘when’ rather than ‘if’.
“Investors buy on sentiment, rightly or wrongly, that’s what they do,” he explained.
“They’ll fall into two camps: those who are properly asset-allocated who will continue to invest in the UK, and those that are driven by sentiment – and they’ll invest back into the UK either when we see a bit of a fall back and they think there’s value, or just when there’s some good news which entices them back in again.”
“The fact that the UK isn’t the most popular area for new money coming in, that won’t last – at some point that will turn around again.”
However, many financial experts expected the IA UK All Companies sector to experience inflows again following the election result and the introduction of a pro-business, majority Conservative government.
Speaking to FE Trustnet last month, Haynes told FE Trustnet that, because so many investors were expecting a weak coalition to come into power, people became bearish on UK growth funds.
“With the impending general election and the UK stock market hitting new peaks, it is not a surprise to see some profit taking from UK growth funds. However, we still believe that there are good opportunities for UK stock-pickers in the sector,” he said.
“If the election should provide a favourable outcome for investors then this would attract monies back to UK growth funds.”
One month on, the data from the Investment Association shows that this hasn’t happened yet. What’s more, Hollands remains pessimistic as to whether UK investors will buy back into the sector in the near future.
“People are nervous. There’s a lot of talk about the UK recovery and the data has been quite good but growth appears to be stalling across the globe at the moment and some of the recent data shows that it is still quite a fragile in the UK,” he said.
“Obviously the UK stock market indices have got a high bias to commodities, whether that’s the energy companies or the oil & gas companies, and that’s a part of the market that is of course really struggling – the slowdown in China is one of the major drivers of that.”
“I think people would want to see a pick up in the pace of the recovery and that it isn’t running out of steam. Clearly if the commodities markets and sectors pickup in demand, that would be beneficial for the UK market. But there isn’t any sense that that is going to happen any time soon.”
