UK funds suffered a sharp rise in outflows in August due to investor concerns about valuations, trade tariffs and forthcoming fiscal policy.
According to figures from the Investment Association (IA), the industry’s trade body, a net £1.8 billion was withdrawn by UK retail investors.
This is a significant increase on the £277 million of outflows the previous month.
The outflows were across the board. Equity funds were hardest hit with a total of £2 billion in outflows.
However, index tracking funds also saw their biggest ever monthly outflows following a 22-month streak of consecutive inflows.
Responsible investment funds saw a net retail outflow of £442 million and government bonds experienced a record-high £601 million in redemptions.
The two asset classes that saw inflows, albeit ones reduced from the previous month, were mixed asset funds (£180 million) and fixed income (£101 million)
According to the IA, the negative investor sentiment, which began in July, was down to a combination of inflationary pressure and weakening expectations of interest rate cuts impacting risk appetites and investment strategies.
Investors’ caution has also been exacerbated by the uncertainty over the long-term impacts of global trade tariffs as well as concerns over equity valuations.
An additional factor is the expectation of fiscal changes by the UK government in the Autumn budget – such as pension reforms and tax increases, a pattern that was seen in the previous year.
More than £9.4 billion was pulled from funds in the two months leading up to the 2024 budget.
“While August is typically a quiet month, and this month especially so – with gross sales of £23.9 billion, down 10% when compared to August 2024 – the significant increase of £1.8 billion in net outflows does signal clear investor caution,” said Miranda Seath, director, market insight & fund sectors at the IA.
The fact that outflows were led by equities reflects rising caution and reassessment of regional risks versus US dollar diversification, according to Seath.
Meanwhile the outflows in index tracking and government bond funds raise questions about the impact of deficits and inflation on certain asset classes.
“Looking ahead, sentiment is expected to remain cautious as markets balance stretched equity valuations, higher long-term bond yields and persistent political and fiscal uncertainties,” added Seath.
“In the UK, speculation over potential pensions reforms in the upcoming Autumn Budget may increase pressure, risking a repeat of the seasonal outflows observed before last year’s fiscal event.”