Equity funds in the UK saw record-breaking outflows in October, as investors pulled a net £2.71 billion from their holdings, according to Calastone’s latest Fund Flow Index.
The surge in selling activity followed September’s already weak performance, marking a second consecutive month of outflows and the worst month for equity funds on record. The heightened sell-off was largely attributed to the UK government’s capital gains tax increase, prompting investors to cash in profits at lower tax rates before the Budget announcement.
“Fears of a capital gains tax grab in last week’s budget spurred investors to book their profits and crystallise a lower tax bill well before the Chancellor rose to her feet in the Commons. Unease in September meant the early birds took fright first, but by October investors were flocking for the exits,” explained Edward Glyn, head of global markets at Calastone.
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Calastone’s transaction data, covering over 85% of the market, revealed a 36% month-on-month rise in sell orders, totalling a record £17 billion, while buying activity also jumped 20% month-on-month. Notably, sell orders plummeted 40% overnight on Budget Day, reflecting the direct impact of the tax hike. “The startling change in behaviour between 29th October and Budget Day is a clear indication that tax was the main motivation for all this activity,” said Glyn.
UK-focused funds were hit hardest, with outflows of £988 million, making it the fourth worst month for this sector. Equity income funds, heavily invested in UK stocks, also suffered, losing £733 million, marking their third worst month. Even global equity funds, which have seen sustained inflows, recorded a net withdrawal of £263 million – their first in over two years, as investors cashed in gains.
Meanwhile, bond funds saw their highest inflows since June 2023, with investors adding £631 million for the month. According to the researchers, bond yields have surged in recent weeks as investors have both reassessed the wisdom of deep rate cuts from the US Federal Reserve and have also become concerned about an expected government borrowing and spending binge in the UK.
Money market funds, another safe-haven asset, saw net buying of £402m, boosted by concerns that interest rates may remain elevated following the Budget. Glyn added: “The suggestion that interest rates may stay higher for longer in the wake of the Budget made interest-earning assets like bonds and cash funds more attractive to investors.”
