By Mark McSherry
UK stock funds have suffered persistent annual net outflows — around $160 billion, cumulatively — since England and Wales voted to take the UK out of the European Union, according to a major report from research firm Morningstar.
Scotland and Northern Ireland voted to remain in the EU.
The report said the outflows since the Brexit vote have inflicted on the UK “a collapse in global benchmark weight, and widespread fund closures, signalling a structural loss of relevance rather than a short-term cyclical drawdown.”
Morningstar said: “The UK equity market entered the 2016 referendum with pre-existing structural headwinds — declining domestic pension demand, capital rotating toward US growth markets, and an unfavourable sector mix.
“Brexit amplified and accelerated these trends, increasing the UK’s perceived risk premium and damaging confidence at a critical moment …
“Investor behaviour has been unambiguous: UK allocations were systematically redeployed to the US, while passive strategies gained share as active UK equity economics deteriorated.
“The result is a market that is under-owned, under-researched, and heavily benchmark-driven …
“COVID, global inflation, geopolitical conflict, falling FDI, weaker goods exports, and domestic policy missteps (notably 2022) further eroded international confidence.
“Isolating Brexit’s impact is difficult — but there is no serious argument that it did not materially worsen outcomes …
“Since 2022, UK equities have outperformed US and global markets, driven by a strong value rotation and resilient dividends — without meaningful multiple expansion …
“The UK trades at a 30% to 35% P/E discount to the US, with small and mid-caps the most depressed, relative to history and developed peers.
“Elevated mergers and acquisitions activity and record buybacks suggest corporate insiders and overseas acquirers see value where public investors remain sceptical.”
Morningstar said flows into UK equity funds came under pressure following the referendum, and since the formal exit in January 2020, that pressure has hardened into six consecutive years of net outflows.
“In total, more than USD 160 billion has been withdrawn, and redemptions have been broad-based,” said the report.
“Whether this represents a structural loss of confidence or a market investors no longer consider relevant, the scale and consistency of the outflows speak for itself …
“UK investors have historically exhibited a home bias, overweighting domestic equities relative to their global benchmark share. That preference has not merely faded — it has collapsed to the point of near home blindness.
“In the most aggressive GBP allocation Morningstar Category, average UK equity weights have fallen from 40% to 18%.
“The capital that is left has not sat idle — it has been systematically redeployed into US equities, which now dominate multi-asset portfolios to a degree that would have seemed extraordinary a decade ago.
“The UK’s diminishing footprint in global benchmarks tells the same story. From nearly 10% of the MSCI ACWI 20 years ago, the UK now represents just 4% — a halving of its global weight that has mechanically forced index-tracking allocations lower still.
“For passive investors, this is not a discretionary choice but an automatic consequence of benchmark drift …
“Persistent outflows and shrinking allocations have had a profound impact on UK-focused asset managers. Since 2016, around 380 UK equity strategies have closed, against just over 200 launches.
“Each closure is a commercial verdict. It signals that the economics of running an active UK equity strategy—already under pressure from fee compression and passive competition—have become increasingly difficult to justify.”
Morningstar said outflows from UK equities have not been distributed evenly, and for active managers, the picture is particularly damning. Since 2016, outflows have primarily happened at large-cap, active managers.
“Among the hardest hit were Columbia Threadneedle, Jupiter, Liontrust, Aviva, and Schroders,” said the report. “The winners tell the opposite story. The largest inflows across UK equity strategies have flowed almost exclusively to passive providers, notably iShares and Vanguard. The proportion of total index money has risen from 22% to 46% since 2016.”