As outflows from UK equity strategies hit £3.1bn during the first half of the year, income funds seem to have been among the worst affected, according to data from FE Analytics.
While there have been some tentative signs that some international asset allocators are beginning to look once more to the UK, uncertainty over the UK economic outlook and Brexit has continued to deter retail investors.
According to data from the Investment Association, £3.1bn has exited UK equity strategies located in the IA UK All Companies, IA UK Equity Income and IA UK Smaller Companies sectors during the first half of the year.
The worst hit sector has been the IA UK All Companies with net redemptions of £2.5bn during the opening six months of 2018, including a £1bn outflow in May alone.
Indeed, the sector has been hit with net outflows in every month since April 2017. Since June 2016, when the EU referendum took place, with outflows totalling £6.4bn.
Since the referendum, UK equity income funds have seen £2.1bn in outflows while £121.6m has been pulled out of UK smaller companies strategies. In total, £8.7bn has left UK equity strategies since June 2016.
During the first half of 2018 the IA UK Equity Income sector saw outflows of £890m, while the IA UK Smaller Companies sector has recorded inflows of £241m.
Following the latest monthly outflow data from UK equities of £280m in June, Investment Association chief executive Chris Cummings said: “Brexit uncertainty continues to weigh on investors with UK equities facing a further month of outflows.
“As we approach the deadline for the UK leaving the EU both sides must commit to building a framework that delivers prosperity for the millions of savers in the UK and Europe.”
Yet, while flows have been negative, UK equities have continued to grind higher – albeit at a slower rate than other developed markets.
Performance of index since EU referendum
Source: FE Analytics
As the above chart shows, the FTSE All Share index – representing 98-99 per cent of the UK market capitalisation – has generated a total return of 30.37 per cent compared with a 49.60 per cent rise in the MSCI AC World index – which captures large- and mid-cap stocks from 23 developed markets and 24 emerging markets, covering 85 per cent of the global investable equity opportunity-set.
Below, FE Trustnet reveals which UK equity funds have seen the biggest outflows during the first half of the year given increasingly negative sentiment from retail investors.
iShares Equity Index (UK)
The biggest loser to outflows among UK equity strategies was a passive fund: iShares Equity Index (UK). The index tracker saw outflows of £1.8bn during the first half of the year, according to data from FE Analytics.
The five FE Passive Crown-rated fund aims to closely track the FTSE All Share index and is overseen by Kieran Doyle.
During the first six months of the year, the fund – which has a yield of 3.17 per cent – delivered a total return of 2.60 per cent compared with a gain of 1.69 per cent for the FTSE All Share.
Assets in the iShares Equity Index (UK) fund now stand at £9.3bn as positive performance added £183.9m to the fund’s assets.
LF Woodford Equity Income
Also topping the list from the IA UK All Companies sector is the FE Alpha Manager Neil Woodford’s LF Woodford Equity Income strategy.
The manager’s flagship fund, which launched in 2014 and moved from the IA UK Equity Income sector earlier this year, saw outflows of more than £1.4bn during the first half of the year, according to data from FE Analytics.
Performance of fund vs sector & benchmark during H1 2018
Source: FE Analytics
However, outflows from UK equities have coincided with a difficult time for the veteran investor’s income fund, which has experienced several high profile single-stock issues over the past year.
As such it has lost 7.23 per cent during the first half compared with a 2.66 per cent gain for the average IA UK All Companies sector fund.
At the end of June, LF Woodford Equity Income stood at £6.1bn down from £8.2bn at the end of 2017 as a hit of £610m from negative impact was factored in.
Invesco Perpetual High Income & Invesco Perpetual Income
Two other refugee income funds that have made a home in the IA UK All Companies sector also saw big outflows during the first half: Invesco Perpetual High Income and Invesco Perpetual Income.
The two funds managed by FE Alpha Manager Mark Barnett – who worked closely with Neil Woodford before the latter’s departure – saw outflows of £913.6m and £583.4m respectively.
They too have experienced a weaker first half than the FTSE All Share benchmark and their average peer, with Invesco Perpetual High Income down by 1.19 per cent and Invesco Perpetual Income losing 1.79 per cent.
By the end of the first half, the size of the Invesco Perpetual High Income fund had fallen to £9.2bn from £10.3bn with a negative performance of £224.4m factored in. Meanwhile Invesco Perpetual Income dropped from just under £5bn to £4.3bn, with a negative performance impact of £144.8m.
Trojan Income
While the Woodford and Invesco funds now reside within the IA UK All Companies sector due to yield requirements, the IA UK Equity Income sector fund with the biggest outflows was Trojan Income.
The fund – which is run by FE Alpha Manager Francis Brooke and deputy managers Hugo Ure and Mark Wharrier – recorded a net outflow of £401m during the first half.
The strategy invests substantially in UK large-caps with its largest exposure to the consumer goods sector representing 29 per cent of the portfolio. Its largest holdings include Royal Dutch Shell (5.6 per cent), Unilever (5.5 per cent) and BP (5 per cent).
During the first half of the year the fund recorded a 0.48 per cent total return compared with a 1.71 per cent gain for the average fund in its sector.
Over the course of the first half, Trojan Income dropped from £3.3bn to £2.9bn during the first half of the year with a negative performance effect of £35.2m.
R&M UK Equity Smaller Companies
As mentioned above the IA UK Smaller Companies sector has seen less of an impact from a downturn in sentiment towards the UK and as a result the scale of outflows have been lower.
The R&M UK Equity Smaller Companies fund stands out in the sector, however, having lost £253.1m over the course of the first half of the year. However, this is likely down to a change in manager.
It has been run by FE Alpha Manager Daniel Hanbury since April who returned to the helm following the departure of former manager Philip Rodrigs from River and Mercantile earlier this year.
Performance of fund vs sector & benchmark during H1 2018
Source: FE Analytics
In the six months to 30 June, the fund generated a total return of 0.35 per cent, compared with a 0.41 per cent for the Numis Smaller Companies + AIM Excluding Investment Companies index benchmark. However, it lagged the average sector fund’s total return of 5.29 per cent.
FE Analytics data shows that the fund dropped from £907.3m – one of the largest funds in the sector – to £642.92m with an £11.3m impact from negative performance.