UK equity funds saw investor outflows in January, despite record UK share prices, as investors turned cautious on domestic markets, according to the latest Fund Flow Index from data provider Calastone. A net £640m was withdrawn from equity funds, marking a shift in sentiment after strong inflows in the final two months of 2024.
UK-focused equity funds were hit the hardest, shedding £1.07bn, making it the sixth worst month on record for the sector. This continued trend of outflows highlights the ongoing lack of investor confidence in UK equities, even as share prices reached new highs. European equity funds also struggled, with net selling of £265m, ranking January among the top 20 worst months for the sector. Meanwhile, Asia-Pacific, China, and Japan-focused funds also experienced investor withdrawals.
In contrast, North American equities remained the standout performer, attracting £576m in net inflows, as US stock markets rebounded strongly following a weaker December. Global equity funds also saw strong inflows, reinforcing the continued preference for US and global markets over UK and European equities.
Fixed income funds, which had been benefiting from investor confidence in falling interest rates, saw inflows drop sharply. Net inflows fell by two-thirds month-on-month to £267m, marking the sector’s weakest performance since September 2024, when investors had taken profits after a prolonged bond market rally.
Within fixed income, sovereign bond funds saw the steepest decline, with inflows plunging by almost 90% to just £41m. In contrast, corporate bonds and high-yield bond funds held up better, attracting relatively steady inflows.
Mixed asset funds also saw reduced demand, with inflows dropping to £960m, reflecting a broader shift in investor sentiment toward caution amid market uncertainty.
UK retail investment in equities among G7’s lowest: Abrdn
The latest figures suggest that investors remain highly selective in their asset allocation, favouring US equities while reducing exposure to UK, European, and Asian markets, according to the data provider. Meanwhile, the shift in fixed-income flows indicates a hesitant approach to bonds, as investors balance interest rate expectations and economic uncertainty.
As markets adjust to the evolving economic landscape, UK equity funds face continued challenges in attracting investor confidence, even as domestic stocks perform strongly. According to Calastone, the coming months will be crucial in determining whether UK equities can shake off their “unloved” status or if investor preference for US and global markets will persist.
Edward Glyn, head of global markets at Calastone said: “UK fund investors seem to have given the government’s fretful growth narrative a clear thumbs down. The UK stock market reached all-time highs in January, but investors merely took this as an opportunity to get out while the going was good. Meanwhile, political instability and increasing anxiety about the economy have put Europe back on the sell list after a strong 2024 for inflows driven by rising share prices.
Apparently, nothing can dent the enthusiasm for US stocks, however. Even the DeepSeek AI shock that happened late in the month spurred appetite rather than fear. The day after technology companies saw $ 1 trillion wiped off their market value, North American equity funds had their best day of the month with £167m of net inflows.”
Glyn added: “Bond markets had a terrible start to 2025 with yields on benchmark US Treasuries and on UK gilts surging to their highest level since before the Global Financial Crisis (bond prices fall when yields rise). Investors bought into this market decline in the first half of the month – enabling new capital to lock into these ultra-high yields, before turning net sellers as calm returned. This is a pattern we often see in the millions of trades Calastone processes every month. Bond yields remain high, with the outbreak of an inflationary trade war potentially keeping them at elevated levels.”
