Nervous investors pulled an eye-watering £15.3 billion out of UK Equity Income funds in the 16 months to April 2019, Morningstar data reveals.
The stark figures highlight how the once-popular sector has been falling out of favour with investors. It’s an issue which came to a head last week when the £3.5 billion Woodford Equity Income fund was forced to suspend trading as it struggled to cope with a flood of investor redemptions.
UK Equity Income funds were haemorrhaging assets between January 2016 and April 2019, Morningstar data shows, as the uncertainty around Brexit and the UK economy pushed the region out of favour with investors.
Bhavik Parekh, associate analyst at Morningstar, says: “Having recently seen a fund suspend dealing due to large outflows, we wanted to look more closely at the Morningstar UK Equity Income category and explore why these funds have experienced such high outflows in recent years.”
UK Equity Income funds have historically been a popular choice among investors as they aim to deliver the attractive combination of capital growth along with a reliable income. The latter has been particularly appealing in recent years when interest rates have been rock-bottom. The funds typically focus on big blue-chip firms known for their reliable dividend payments. They also offer an element of global diversification because of the international earnings generated by these businesses.
But performance in recent years has been poor. The category’s performance has been bettered by all other UK equity categories and comparable benchmarks since January 2016. Investors have, unsurprisingly, voted with their feet. At its peak, the Morningstar category held £75 billion of investors cash, but today assets have dwindled to £64 billion.
Parekh says: “Regardless of the possible benefits, if returns are poor, investors will go elsewhere.”
Brexit Damage
The plight of UK equities has largely been led by the uncertainty around Brexit since the referendum in June 2016. A lack of clarity about how the UK will leave the bloc and what its relationship with the EU will be have discouraged investment in the region as well as fears about the potential effect on the UK economy. A volatile political backdrop has added to the negativity.
Adrian Lowcock, head of personal investing at Willis Owen, says: "Brexit remains unresolved and a solution to the problem remains even more elusive. Under these circumstances, markets and investors are going to wait before they allocate more money to the UK."
The UK equity funds of investment giant Invesco have suffered the greatest outflows over the period, Morningstar analysis shows. Around £7.5 billion was withdrawn from its equity income range between January 2016 and April 2019 – almost half of the total net outflows.
Woodford Equity Income, meanwhile, endured outflows of £3 billion. The heavy redemptions have forced the fund to suspend trading so that it can manage its liquidity.
It is larger funds such as these, which have borne the brunt of investor redemptions. The largest 25% of funds accounted for 90% of total outflows.
Parekh adds: “But it not doom and gloom for all funds; there were some notable exceptions that managed to acquire significant assets.”
Most notably among these are the Bronze-rated Man GLG UK Income fund, which has not suffered a single month of net ouflows since February 2016. Indeed, the fund has attracted £850 million of new assets since then. Close behind, the Silver-rated Troy Trojan Income fund has attracted £829 million of assets over the same period. The funds have produced annualised returns of 12.2% and 4.1% respectively over three years.
Meanwhile, the JOHCM UK Equity Income and Franklin UK Equity Income funds have each attracted around £450 million of assets. Both have a Silver Rating from Morningstar analysts.
Parekh says: “UK equity fund managers have had a difficult time recently, especially with political turbulence such as Brexit, but some have managed to shine through, producing strong returns and attracting investor interest. They demonstrate that, with improved returns, the category may manage to attract back some of the investors it has lost.”
