With Brexit uncertainty making UK equities one of the most unloved sectors for asset allocators over recent years, the sudden improvement in the political backdrop last December resulted in a surge of inflows back into the asset class.
The general election at the end of last year resulted in a substantial victory for Boris Johnson’s Conservative party and significantly reduced the number of seats held by the Labour party.
This signalled a rejection of the left-wing policies espoused by leader Jeremy Corbyn and provided greater clarity of the direction for Brexit negotiations, improving investor sentiment.
As such, UK equity funds saw inflows of £1.4bn during the final quarter of 2019 with 90 per cent of that sum arriving in December alone, according to data from the Investment Association.
It marked a tremendous turnaround in sentiment from the third quarter when UK equity strategies witnessed £2.2bn in outflows.
Most of December’s inflows were directed towards the IA UK All Companies sector which saw net retail sales of £772.4m.
However, it was a positive month for all of the main UK equity sectors with IA UK Equity Income recording inflows of £228.8m and IA UK Smaller Companies £278.6m.
December was the strongest month of the year for net retail sales as the industry saw inflows of £3.6bn on improving sentiment – not only due to the general election, but also progress on the US-China trade war front.
As was seen across 2019, passive index-tracking funds sucked up much of the inflows, and this was true of the UK equity sectors that benefited from improved sentiment in December.
The FE Analytics Market Movements tool shows which UK equity funds investors turned to as the political outlook for the UK became clearer.
As the table below shows, investors sought out a number of index-tracking funds in December for their UK equity exposure, with passives accounting for four of the top-10 best-selling products.
Source: FE Analytics
The £10.8bn Vanguard FTSE U.K. All Share Index fund – which was one of the best-sellers of the year – was the most popular with investors during December with inflows of £314.2m.
It was joined by several other passive funds: State Street UK Equity Tracker (£274.7m), Scottish Widows UK All Share Tracker (£166.7m), and HSBC FTSE 250 Index (£133.1m).
The first actively managed fund to pop up on the list was the £3.7bn TB Evenlode Income fund, with inflows of £108.5m in December.
The five FE fundinfo Crown-rated UK fund is overseen by Alpha Manager Hugh Yarrow and Ben Peters. Last year it made a total return of 24.25 per cent, outperforming its peer group (22.24 per cent) and FTSE All Share benchmark (19.17 per cent).
Another popular fund with investors was Franklin UK Mid Cap, which attracted inflows of £106.5m in December. The £1.4bn fund was one of two – alongside HSBC FTSE 250 Index – focusing on the UK mid-cap space that attracted significant inflows.
Franklin UK Mid Cap returned 42.3 per cent last year, outperforming its FTSE 250 ex Investment Companies benchmark (30.79 per cent).
Asset manager Franklin Templeton announced that manager Paul Spencer would be retiring in September, with colleague Richard Bullas set to take over as lead manager from June.
Other active funds in the top-10 included several well-known strategies: JOHCM UK Dynamic, Royal London Sustainable Leaders Trust, Liontrust Special Situations and CFP SDL UK Buffettology.
In the UK Equity Income sector, JOHCM UK Equity Income emerged as the most popular strategy, growing by £112.8m in December.
Source: FE Analytics
The £3.3bn fund, managed by James Lowen and Clive Beagles, made a total return of 20.02 per cent, in line with the peer group’s 20.07 per cent gain.
Another popular UK equity income name in December was Troy Asset Management’s Trojan Income fund, attracting £49.8m in new money. The £3.4bn fund is managed by Alpha Manager Francis Brooke, Hugo Ure and Blake Hutchins. It made a total return of 20.45 per cent last year.
“December was a notable month in UK politics with the third general election in five years resulting in a landslide Conservative majority of 80 parliamentary seats, the largest since 1987,” the managers wrote. “Short term, this provides an incrementally better backdrop for investment in the UK, and equity and currency markets have understandably reflected this view in subsequent movements.”
The sector’s only passive fund – Vanguard FTSE UK Equity Income Index – also took in inflows of £32.8m during the final month of last year.
Other popular equity income funds included: Franklin UK Equity Income, Royal London UK Equity Income and Quilter Investors UK Equity Large-Cap Income.
Finally, in the UK smaller companies sector, the £1.9bn ASI UK Smaller Companies fund saw the most new money in December with inflows of £60.5m.
Overseen by veteran small-cap investor Harry Nimmo, the fund is popular among advisers and made a return of 46.24 per cent last year, compared with a 25.34 per cent gain for the average IA UK Smaller Companies fund.
Source: FE Analytics
There were fewer big new allocations to funds in the smaller companies sector during December. The largest were directed towards Janus Henderson UK Smaller Companies, TB Amati UK Smaller Companies and LF Gresham House UK Micro Cap.