Investors Flock To US Equity Funds As UK Falls Out Of Favour – Forbes Advisor UK
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4 April: FTSE Lags Behind Overseas Counterparts
UK investors continued to abandon investments with a domestic bias in the first quarter of 2024, pouring billions of pounds into US-focused funds instead, writes Andrew Michael.
According to funds network Calastone’s latest Fund Flow Index, investors channelled £6.97 billion into equity funds in the first three months of 2024. This compared with a net outflow from equity funds of £1.24 billion in all of 2023.
This year’s first quarter inflow included £5.72 billion going into North American funds, with £1.77 billion of new capital in March alone.
Calastone said more UK investor cash flowed into North American equity funds between December last year and March 2024 than in the previous nine years combined.
In contrast, investors withdrew £823 million from UK equity funds in March 2024. This was the thirty-fourth consecutive month in which the sector experienced net outflows, taking first quarter losses for the sector to £2.13 billion.
Calastone said global equity funds and emerging markets funds also experienced strong inflows last month, adding that money going into funds with a European theme “slowed sharply”.
Global equity markets in general have surged since the end of October last year, with the US, Japan and Europe all up by around a quarter. But the UK’s FTSE 100 index of leading company shares has only seen relatively modest growth, up around 8.6% over this period.
That said, the FTSE 100 almost breached its record intraday high of 8,047 earlier this week, a level it achieved in February 2023. The index has since dropped back below 8,000.
Calastone’s Edward Glyn said: “UK equities are certainly cheap, but investors worry where the growth is going to come from to drive earnings higher. Add a relentless narrative of gloom about the prospects for the London stock market and it’s hard to persuade anyone to hold UK-focused funds.
“Meanwhile the US earnings recession is over. Profits are once again on the up and that seems to be the main catalyst driving fund inflows and higher share prices.”
Frédérique Carrier, head of investment strategy at RBC Wealth Management, said: “Many investors are celebrating the fact that UK equity indices have reached or are close to breaching their all-time highs. But in a global context, the performance of UK equities remains disappointing, having markedly lagged other developed markets equities indices again year to date and over the past year.
“We have downgraded UK equities to underweight, from market weight in March, despite their low valuation as it is difficult for us to see a catalyst that can sustainably unlock this value.”
26 March: 10,000 Misleading Posts Removed Last Year
The Financial Conduct Authority (FCA) has told social media ‘finfluencers’ that they risk criminal prosecution if they break advertising rules on promoting financial products and services, writes Andrew Michael.
In recent years, social media has become a popular tool within financial services firms’ marketing strategies. But against the backdrop of Consumer Duty rules introduced last summer to help their customers make good financial decisions, the FCA says social media is not always the best place to promote complex products.
The regulator told firms that adverts across social media platforms must be “fair, clear and not misleading”. It also asked firms to consider whether a platform that limits character counts or space is the right option for promotions.
It said marketing material must have balance and carry the right risk warnings so people can make well informed financial decisions: “Firms are on the hook for all their financial promotions and the FCA has warned they need to ensure influencers they work with communicate to their followers in the right way.”
The FCA warned that if social media influencers promoted financial products or services without proper authorisation, they may be committing a criminal offence punishable by up to two years in prison, an unlimited fine, or both.
The watchdog said scrutiny of financial promotions had been “ramped up” and that it had removed 10,000 misleading adverts last year compared with 8,500 in 2022.
The Advertising Standards Authority, which also has powers to fine wrongdoing, expects influencers to label content as an ad upfront if they receive any form of payment. For high-risk promotions, warnings need to be displayed throughout the promotion and not be hidden or obscured by designs or features on the platform.
Lucy Casteldine, the FCA’s director of consumer investments, said: “Any marketing for financial products must be fair, clear and not misleading so consumers can invest, save or borrow with confidence. Promotions aren’t just about the likes, they’re about the law. We will take action against those touting financial products illegally.”
Susannah Streeter at Hargreaves Lansdown said: “Regulators are clearly horrified at the damage superstar celebrities can do to the bank balances of vulnerable customers, who are influenced by almost every move they make. The delusions of quick riches can spread far too rapidly on social media with speculation amplified by reposts of millions of followers.”
Laura Suter at AJ Bell, said: “We know that social media plays a huge part in people’s research of investment products, particularly among younger, newer investors. There is a darker side to many of these posts, and a significant risk of finfluencers spreading misinformation or encouraging high-risk behaviour, such as day trading in individual stocks, without properly explaining these risks.”
19 March: Robinhood Launches With Fee-Free Offer
Robinhood, the US share trading platform and app, launches in the UK today after a three-month period gathering feedback from would-be UK customers, writes Andrew Michael.
Online platforms and share dealing apps allow retail investors to buy and sell investments directly, instead of using a financial advisor – so what does Robinhood’s entry into this already-competitive market mean for UK investors?
The company had a prominent role in the so-called ‘meme stock’ GameStop share trading saga in 2021, when small-time individual investors went head-to-head with large financial institutions. The platform was criticised for halting trading in the stock.
Robinhood, which already has 23 million users, will initially offer access to 6,000 US stocks including Amazon, Apple, and Nvidia, via both an app and web browser.
Investors will have the option to trade in fractional shares and participate in 24-hour trading outside conventional stock exchange hours, five days a week, on certain stocks.
A boom in the rise of DIY investing over the past decade, partly prompted by lockdowns during the Covid-19 pandemic, means the market has become increasingly competitive and crowded.
In recent years, established UK providers such as Hargreaves Lansdown, AJ Bell, and interactive investor, have come under pressure from companies including social investing platform eToro and, more recently, Webull UK, and Saxo, the company responsible for Saxo Go.
Robinhood, which pulled the plug on two previous attempts to enter the UK market in 2019 and 2022, is hoping to attract market share by offering accounts with no annual charge and trades that are free from both commission and foreign exchange (FX) fees.
The company says a minimum of £1 can be used to open an account with the wider aim being to attract long-term investors.
Although no FX charges apply per se, according to the company’s standard pricing fee schedule for UK customers points out that “implicit third-party costs of 0.03% are included in the applicable GBP/USD exchange rate”. A £100 deposit would therefore cost 3p.
Significantly, in terms of market competitiveness, Robinhood also says it will pay its UK customers 5% interest on their cash holdings.
Not only is this amount higher than the UK’s current inflation rate of 4%, providing customers with a current ‘real’ return, but the rate also trumps those paid by established rival platforms that are in the region of 2% to 3%.
Robinhood’s relatively high rate of paid interest also focuses attention on a subject that has become an important issue in recent months.
Before Christmas, the UK regulator, the Financial Conduct Authority, warned providers to behave fairly and in accordance with its Consumer Duty rules in terms of the interest they retained for themselves and the amount they paid out to customers.
When customers sign up for a Robinhood account, they also earn a reward equating to a fraction of one share. The bulk of these will be worth between £6 and £7, although a small minority of new joiners will receive a share worth up to £140. The same incentive also applies to Robinhood’s friends and family sign-up offer.
As well as being FCA-authorised, Robinhood says its UK customers are eligible for Securities Investor Protection Corporation coverage, which protects customers up to around £400,000 ($500,000) in the event the brokerage went bust. Cash deposits earning 5% interest worth up to £1.8 million ($2.25 million) are insured with the Federal Deposit Insurance Corporation.
These protections are higher than the standard £85,000 limit offered by the UK’s Financial Services Compensation Scheme.
The company also acknowledged an appetite amongst British investors for “local tax wrappers such as individual savings accounts, exchange-traded funds, and UK stocks”, adding these would be under consideration going forward.
Jordan Sinclair, president of Robinhood UK, said: “Today’s general availability marks the start of a new chapter for Robinhood. We’ve been actively gathering feedback since our waiting list launch at the end of 2023. It’s clear that retail investors regard the traditional trading fees that they are expected to pay as a real pain point.”
Sinclair declined to be drawn on whether the company’s fee-free promise would last indefinitely.
6 March: Plans Open To Consultation Until June
Today’s Budget proposal to extend the range of individual savings accounts to include a ‘British’ or ‘UK’ ISA with the onus on investment in UK-listed businesses is meeting with a mixed reaction, writes Andrew Michael.
An ISA-holder can currently shelter up to £20,000 each year without paying tax on interest or returns. The ISA product range stretches from bank and building society cash accounts to stocks and shares versions which provide investors with exposure to the stock market.
Although still in its consultation phase, which is due to last until June, the plan is for the British ISA to provide an additional £5,000 allowance each tax year providing investments are made in home-grown firms.
According to the Treasury, the proposed ISA “will provide individual investors with an additional opportunity to save whilst supporting investment in the UK and benefiting from its growth”.
However, in performance terms, there are concerns that retail investors would pay the price for their domestic loyalty because of the London stock market’s lacklustre performance in recent years.
Research has shown that investors choosing British shares over their international rivals could lose out in the long term. According to investing platform AJ Bell, someone who invested £5,000 a year for 10 years into a tracker fund that followed the UK’s broad FTSE All Share stock index would have made £67,658.
But an identical investor who favoured a fund such as Fidelity Index World, which copies the performance of the global MSCI World stock index, would have received a return of £97,488 – £30,000 more than the UK-based investment.
Commenting on the proposal, Michael Summersgill, chief executive at AJ Bell, said: “Increasing investment into UK companies is a laudable aim, but this ill-conceived, politically-motivated decision will simply not achieve that objective.
“50% of the money our customers currently invest through their stocks and shares ISAs is invested into UK assets, so this new allowance will have no impact whatsoever on their investment behaviour.
“A tiny minority of people max out their £20,000 ISA allowance each year, but these are the only ones that will see any benefit from the additional British ISA allowance. For most people, the British ISA only adds an unwelcome complexity. People will now have another option to evaluate when deciding which ISA type is right for them.”
Jason Hollands, managing director of Bestinvest, said: “The British ISA is undoubtedly a victory for the City stockbrokers and bankers who have lobbied hard for it amid a drought in initial public offer and deal fees and a worrying sapping of companies listed in London to New York.
“However, I am doubtful it will drive anything like the increased flows into UK equities being talked about. Proponents claim it might drive £200 billion extra cash into UK equities over five years, but it is hard to reconcile such a figure with the fact that the existing, larger ISA £20,000 allowance attracted a lesser amount into stocks and shares over the last five years according to data disclosed by HMRC.”
John Thornber, investment manager at Irwin Mitchell Asset Management, said: “With regard to the mechanics of the British ISA, there are immediately a number of questions that we will need to see addressed to understand its efficacy in really helping spur effective investment in UK plc.
“For instance, many UK-focused funds are allowed, under Investment Association rules, to invest a proportion of assets outside of the UK, while still being a ‘UK equity’ fund. Allowing funds with such a broad mandate within the new allowance would seem sub-optimal.”
Gianpaolo Mantini, a chartered financial planner at Saltus, said: “Any additional tax efficient incentive to support UK PLC is always to be encouraged. However, it would be great to see the detail on this to see how it encourages genuine growth and supports innovation. To do so it needs to exclude the FTSE 100 which is realistically more global than British.”
Matthew Carter, head of savings at Coventry Building Society, said: “The move to add an extra £5,000 to benefit those with stocks and shares ISAs means the Chancellor has missed an open goal opportunity to increase broader cash ISA limits, and instead, adds further complexity across the ISA range.
“Adjusted for inflation, the £20,000 ISA allowance set back in 2017 should be £26,400 today.”
Read Andrew Michael’s assessment of the British ISA’s chances of success.
5 March: ‘Magnificant 7’ Stocks Act As Magnet For US Funds
UK investors bought heavily into stocks and shares-based funds last month, with North American equity funds attracting strong inflows of cash, while domestically invested portfolios continued to leak money, writes Andrew Michael.
According to funds network Calastone’s latest Fund Flow Index, investors piled into equity funds at their fastest rate in three years in February 2024, adding £2.66 billion overall to their holdings.
The company said the month’s figure was the best for inflows since May 2021, and the fourth highest amount in nine years, since its records began.
February 2024 was also the fourth consecutive month when the funds industry recorded net inflows of investor money. Before this recent run, investors had pulled around £8.6 billion from funds in an 18-month period up to November 2023.
Calastone said the main reason for the upsurge in investor interest was the strong rally in the US market since last autumn. In particular, the influence exerted on global stock markets by companies known as the ‘Magnificent Seven’, has been a significant factor feeding investor appetite for share-based investments.
The Magnificent Seven is made up of Alphabet (Google’s parent), Apple, Amazon, Meta Platforms (Facebook’s parent), Microsoft, Nvidia and Tesla.
In the four months since October last year, the combined market capitalisation of the Magnificent Seven has risen by 29%.
Artificial intelligence chipmaker Nvidia has seen its share price soar by 225% in the past 12 months and by 1,595% over the last five years. In January, Meta Platforms said it would be paying a shareholder dividend for the first time.
Calastone said investors channelled £2.54 billion into North American equity funds last month. Other sectors with significant inflows included European equities (£363 million) and the fixed income sector (£329 million).
Offset against this were outflows worth £633 million from UK-focused equity funds, while investors also dumped £229 million from Asia-Pacific funds.
UK funds have experienced a torrid time in recent years. February’s outflow figure represents the 32nd consecutive month that portfolios invested in domestic stocks and shares suffered net redemptions.
Edward Glyn, Calastone’s head of global markets, said: “Investors are going cold on safe havens and jumping back into equities feet first. The US stock market has risen by a fifth since late October, driving accelerating fund inflows ever since.
“The rising tide is not lifting all boats, however. Nothing can persuade UK investors to add capital to their home market. Meanwhile, Asia-Pacific remains stuck in China’s doom loop. For their part, bond investors are adding modestly to their fund holdings.”
2 March: Investors Urged To Scrutinise Managers’ Track Records
Funds worth nearly £100 billion, including ones run by some of the industry’s best-known investment managers, have been identified as consistently underperforming ‘dogs’ by online investing service Bestinvest, writes Andrew Michael.
The firm identified 151 underperforming funds worth a combined £95.3 billion, a significant 170% increase on the 56 funds worth nearly £50 billion that came to light in previous Bestinvest research six months ago.
Bestinvest’s regular Spot the Dog analysis defines a ‘dog’ fund as one that fails to beat its investment benchmark over three consecutive 12-month periods, and which also lags its benchmark by 5% or more over a three-year period.
A benchmark is usually a stock market index, such as the UK’s FTSE 100 or US S&P 500, against which the performance of a fund is measured.
Bestinvest said that the “breakaway” performance of the so-called ‘Magnificent Seven’ US tech stocks over the past 18 months, along with soaring energy company shares in 2021 and 2022, had a dramatic knock-on effect on its latest funds appraisal.
The Magnificent Seven (see story below) comprises Alphabet (Google’s parent), Apple, Amazon, Meta Platforms (Facebook’s parent), Microsoft, Nvidia and Tesla.
About a third (49) of the 151 funds in Bestinvest’s dogs ranking come from the global equity sector. Of these, about half focus on sustainable investing and “did not participate in the sharp rise in oil and gas-related shares, nor defence stocks” that took place during its review.
A further 34 funds on its list were UK portfolios, worth collectively about £12 billion.
Bestinvest said the worst performing fund in its latest dog list is Baillie Gifford Global Discovery, a £610 million global equity fund which would have turned a £100 investment into £47 over three years to February 2024, net of fees and with income reinvested.
Global Discovery’s investment remit involves gaining exposure to “immature, disruptive companies experiencing exciting, formative growth phases”.
James Budden at Baillie Gifford defended the fund’s performance: “Despite…
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