UK investors shy away from responsible funds as returns weaken

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Support for responsible investment funds waned in July as central banks warned interest rates would stay higher for longer than expected.

UK investors redeemed £39mn from investment funds in July, compounding the £432mn taken out in June, according to data from the Investment Association, the industry group.

In June, the Federal Reserve and European Central Bank warned that rates will have to stay higher for longer as inflation remained high. Funds in the responsible sector are heavily exposed to growth stocks, such as tech companies, which have seen their share prices suffer over the past year due to rising interest rates.

Responsible investment funds saw huge inflows in 2019 and 2020 as climate change warnings increased and the funds’ performance boomed due to their low exposure to sectors such as air travel and fossil fuels, where valuations crashed during the pandemic.

The number of these funds on offer to UK savers rose 31 per cent last year, according to the IA, taking the percentage of total assets under management in UK responsible funds from 3.9 per cent in 2020 to 6.6 per cent last year.

But the sector began to underperform in 2022 as interest rates rose and oil prices surged — a sector spurned by most responsible investment funds. The MSCI World socially responsible investment index lost 22 per cent in 2022, compared with the MSCI World index’s loss of 17.7 per cent.

While there were outflows of responsible investment funds, July was a “better month” for funds flows overall, said Laith Khalaf, head of investment analysis at broker AJ Bell. Equity funds recorded their highest inflows since December 2021, with £816mn invested in July.

Net inflows were all recorded in fixed income and multi-asset funds, where £520mn and £861mn was invested on a net basis. Money market funds, a proxy for cash, which is seen as a “safe haven” during market volatility, registered net redemptions of £912mn.

However, it remains uncertain whether this trend will continue until the end of the year, Khalaf said. “It is not like sales are going great guns,” he added.

Investors’ preference for global funds continued, with net inflows of £318mn in July. This was at the expense of UK funds, which saw £1bn withdrawn in the month, taking the total outflows so far in 2023 to £7bn.

There is a “clear logic” for investors moving to global funds, said Edward Glyn, head of global markets at Calastone.

“Most of the world’s most successful companies operate globally, so where they are listed is immaterial,” he said.

“Global funds . . . save investors the worry of trying to pick winning regions — retail investors typically lack the time and expertise to stay on top of which parts of the world are on the up and which are on their uppers.”

This trend looks unlikely to change, Glyn said. “On the whole, investors are clearly content to set their allocation preference to global and allow their monthly direct debits to do the rest.”