Ask a fund manager investing in UK shares what is his or her biggest problem and the answer you are likely to get is: redemption.
The investment gurus are not seeking absolution for their sins, financial or otherwise. They are, however, pointing to a crisis of confidence in the UK stock market.
Redemption is the technical term for investors pulling their money out of a fund.
Over the past months and years, redemptions by small savers from funds that invest in UK shares have been taking place on a worrying scale.
March was the 32nd month in a row where there were net withdrawals from UK equity funds by British private investors, according to the Investment Association.
Flagging: Over the past months and years, redemptions by small savers from funds that invest in UK shares have been taking place on a worrying scale
Savers took out more than £13.5billion in 2023, which was the worst year on record, on top of £12billion the year before.
The exodus is terrible for the UK stock market and the wider economy. This level of redemptions means fund managers don’t have the cash on hand to invest in up-and-coming British companies.
In open-ended funds, they are having to dip into resources to give savers their money back.
In order to buy into a new and potentially profitable opportunity, they would have to sell an existing holding.
If an opportunistic bidder comes along with a lowball offer for a UK company, fund managers are under pressure to accept, because they need the cash.
Instead of backing British companies, small investors here are supporting foreign corporations, particularly in the US.
It happened on a grand – in both senses of the word – scale at Coutts.
The posh private bank used by the Royal Family has switched more than £2billion of its clients’ money out of the London stock market and put it overseas. Unpatriotic, maybe, but it is hard to blame anyone, given the respective returns.
There is no great mystery as to the attractions of the US market.
Savers everywhere want to buy into the Magnificent Seven tech stocks: Amazon, Alphabet, Nvidia, Tesla, Meta, Microsoft and Apple.
The movement of money across the Atlantic is gathering pace.
The amount invested in US equity funds in the latest quarter is more than double the £625m that sloshed in during the final three months of 2023.
As broker AJ Bell puts it, the UK funds industry ‘is going through a dark age’.
More than £50billion has been withdrawn from the UK by small savers in the past two years, which is a shocker.
The various reforms put forward by the Government have gone nowhere.
The Great British Isa is a good idea in principle but unlikely in itself to turn the tide.
Bold moves are needed such as the scrapping of Stamp Duty on share purchases.
Another smart measure would be to raise the minimum contributions on auto-enrolment pensions.
These stand at 3 per cent of qualifying earnings for an employee and 5 per cent for the employer, which is nowhere near adequate and should be doubled. That would provide investment capital and give people a better chance of a decent retirement.
Labour is attempting to exploit the loss of credibility the Tories suffered in the financial world in the Truss- Kwarteng interlude.
The party has gone so far as to state in its plan for financial services that it will ‘unashamedly champion’ the sector as ‘one of the UK’s greatest assets’.
We shall see, but someone needs to.
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