Investors who piled £12bn ($16.3bn, €14.3bn) into global equity funds in 2021 are being warned their investments may be much less diverse than they expect.
According to statistics from the Investment Association (IA), the IA Global sector was the most popular among retail investors in 2021, while the IA UK Equity Income sector sat bottom of the charts with outflows of £3.28bn.
To highlight the unpopularity of UK dividend-paying stocks, the sector saw outflows every single month last year as investors were more attracted to the lure of global funds.
The IA UK All Companies sector was equally unpopular, with redemptions of £2.62bn in what was the second-best year on record for retail funds, with savers investing a total of £43.4bn in retail funds in 2021.
Lack of diversification
Ryan Hughes, head of investment research at AJ Bell Investments, noted that it is little surprise that UK equity funds have had a poor year as investors typically shun areas that are having a tough time.
“Retail sales numbers akin to looking in the rear-view mirror as to what’s done well or badly,” he said. “However, as a contrarian investor I find this interesting as looking at areas that other people are avoiding is often a great source of ideas.”
The worry for Hughes, is there be many investors who have portfolios full of growth and technology stocks, who are now rapidly realising they do not have as much diversification as they previously thought.
“Global funds, US funds and tech funds have shown high levels of correlation, while exposure to UK equities that pay a dividend has been about as fashionable as my wardrobe in recent years,” he said.
“Right now though, oils, miners, banks and other cyclicals that make up much of the UK stock market look pretty appealing in a world of rising interest rates, but many investors are still significantly underweight,” he added.
Back to basics
For Hughes, this comes back to the basics of portfolio construction and understanding style and diversification.
“The benefits of having exposure to the unfashionable areas of the market are now being seen but as is often the case, investors are slow to wake up to this and end up buying high and selling low,” he said.
“Having been around a while, I’ll be pretty confident in seeing UK equity sales pick up in about nine months just after UK equities have delivered some decent outperformance.”
Commenting on the findings, Boring Money’s chief executive Holly Mackay, added: “Investor intentions take time to turn around when it comes to out of favour asset classes and so we think this trend will continue into 2022.”
At the same time, Mackay expects inflows into responsible investment funds to continue to surge, after the IA reported in 2021 inflows totalled record £16bn, up from £4bn in 2020.
“The inflows to responsible investment funds show no sign of slowing,” she said. “Investor intentions have continued to grow in this asset class – 26% of all fund investors reported an intention to increase their holdings in sustainable funds, compared to just 20% this time last year.”