UK investors pulled more money out of UK equity income funds in June than in any month since 2012, as fears about the Brexit vote grew – and then investors subsequently reacted to the result.
Data from Morningstar Direct showed outflows from UK equity income funds in Morningstar Categories reached £1 billion in June, compared with £340 million in May. These boosted outflows of UK equity income funds for the first six months of this year totalling more than £1.3 billion outflows.
It is perhaps not surprising to see such a high volume of outflows in UK equity income funds, as the asset class have lagged the FTSE All Share in the first half of 2016, according to a research note issued by Morningstar senior fund analyst Peter Brunt.
“The Morningstar UK Equity Income category average fund, which aggregates all the holdings in each fund within the category to form a hypothetical portfolio, shows a significantly lower weighting to giant-caps and a higher weighting to mid and small-caps relative to the index,” Brunt said.
The UK’s blue-chip index, FTSE 100, which is made up of UK’s largest 100 companies, closed at an 11-month high Monday this week, after tumbling post Brexit vote. Comparatively, FTSE 250, which represents mid and small companies in the UK, continued to lag behind the blue-chip index following the Britain’s vote to leave the European Union.
These outflows are about turn from recent years; UK equity income funds were among the best-selling among UK domiciled funds in 2014 and 2015, according to figures provided by the Investment Association.
Investor Sentiment Falls to Lowest Level
Investor sentiment has dropped to its lowest level following the EU referendum, according to the latest figures from the Lloyds Bank Investor Sentiment Index. UK equities saw the greatest monthly decrease in confidence to a negative 15.3% in July, compared with a positive 6.5% in June.
“Initial reactions were clearly very negative to UK assets, although we did see some investors coming back to the table to buy back into UK shares following the initial sell-off,” said Markus Stadlmann, chief investment officer at Lloyds Private Banking.
“We would expect investor sentiment to continue to be susceptible to sharp, short-term shifts as investors absorb the news flow over the next 2-3 months.”
3 Worst Hit UK Equity Income Funds
The Bronze Rated Artemis Income fund was the sector’s most sold in June with a £369 million outflow. Outflows followed the loss of the fund’s co-manager, Adrian Gosden. Brunt said the loss of Gosden is significant and presents challenges over the short term.
“This, combined with the trend of disappointing performance, has lowered our conviction in the fund,” Brunt said, however Morningstar analysts continue to have a positive view on this core UK equity income mandate. The fund gains 3.3% year to date, and has 9% five years annualised return.
Investors also sold high volumes of UK equity income funds with sustainable returns. Royal London UK Equity Income, the Silver Rated fund, gained 4.8% year to date and it has a 12.3% five year annualised return; however it recorded £193 million outflows in June. This is the largest outflows of the fund seen in five years.
Samuel Meakin, Morningstar fund analyst said that fund manager Martin Cholwill’s strategy is sensible for delivering yield and competitive total returns for investors.
“He targets stocks with strong free cash flow yields that can enhance the prospects of rising dividend payouts; company finances must be strong and those cash flow yields must be sustainable,” Meakin said, “He also seeks out-of-favour stocks and looks to ensure that he is not paying a hefty valuation to secure income for the fund, which can give it some resilience in falling markets.” The ongoing charge of the fund is 1.29%, cheaper than its category median.
Invesco Perpetual High Income, the Bronze Rated fund, also recorded £164 million outflows in June. Morningstar analyst Daniel Vaughan considers fund manager Mark Barnett to be a skilled UK equity investor with a strong record on similar mandates. Although the departure of Neil Woodford in 2014 add pressure on Barnett’s workload, tempering analysts’ conviction to this fund, analysts think it worthy of a positive rating.
Europe ex-UK large-cap equity funds suffered outflows of nearly £3 billion in the first half of the year, and UK Flex-cap equity funds lost £1 billion year to date, whereas multi-strategy funds attracted inflows of £4.4 billion.
