Yield-hungry UK investors switch from equity to debt funds

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UK retail investors are dumping equity funds at the fastest rate since the aftermath of former prime minister Liz Truss’s “mini” Budget last year, in favour of safer, high-yielding debt products.

Data from global funds network Calastone shows that retail and other small investors moved £662mn out of equity funds in June. They poured £1.38bn into fixed-income and money-market funds, whose yields have been lifted by rising interest rates. 

The shift comes as fears grow of a global recession in the second half of the year and as retail lenders come under scrutiny after failing to pass on the Bank of England interest rate, which was last week raised to 5 per cent, to their savings account customers. 

“We are seeing a flight to safety [by UK investors] looking for better yield and shielding themselves from political and economic unrest,” said Edward Glyn, head of global markets at Calastone. “There is a question about whether banks are doing enough to offer decent interest rates to savers,” he added.

The average easy-access savings rate available across all UK banks is 2.45 per cent, according to Moneyfacts.

The data also shows that investors pulled £3.65bn from equity funds over the past 12 months and invested almost £10bn in fixed-income and money market funds.

June marked the 25th consecutive month of outflows from UK equity funds and it was the “worst-ever month” for environmental, social and governance (ESG) funds, according to Glyn.

“We’re seeing this continual shift out of UK equities, the country continues to be incredibly unpopular with investors as we see a flight into global funds,” he said.

Meanwhile, investors put more than £500mn into UK money market funds in June alone, almost as much as the £670mn invested for the whole of 2022.

Data from Vanguard, one of the largest global providers of funds and exchange traded funds to retail investors, shows that investors put more than £200mn into Vanguard’s sterling denominated money market fund in the first six months of the year, exceeding the total amount managed by the fund at the beginning of the year.

Money market funds in the UK managed about £28bn in May 2023, according to data from Morningstar Direct, up from £26bn the month before.

The funds invest in relatively safe, liquid assets including short-term government debt and offer investors a liquid product with stable returns. Unlike bank deposits, however, they are not covered by any deposit protection scheme.

The Bank of England reported last week that consumers in May withdrew £4.6bn from banks and building societies, the highest level of household withdrawals on record.