Triple whammy means £12 billion heads for the hills

The market – and investor confidence – may have significantly further to fall

Blame Brexit. Blame Neil Woodford. Blame Us-china trade wars: whatever the cause, or combination of causes, private investors across the UK pulled £744 million from UK equity funds in June.

It is the highest monthly redemption for more than a year, and takes the total withdrawn from UK equity funds since the Brexit vote to more than £12 billion.

This is becoming less a cautious move to the sidelines than a flight to the hills – and the news flow since June is almost certain to have further swollen the investor exodus.

Fire sales are running to hundreds of millions of pounds by the stricken fund manager Woodford – not that long ago the most widely followed investment manager in Britain. An announcement from Woodford last week that the £3.5 billion Woodford Equity Income fund may remain suspended until December was a further blow. Stockbroker giant Hargreaves Lansdown, which heavily promoted Woodford funds, has also suffered major reputational damage – and an exodus of clients.

But that is only one of three assaults on investor confidence. Markets around the world were shaken last week by news that US President Donald Trump was extending the list of Chinese exports subject to US tariffs. The announcement was a setback to hopes that the two countries might have been edging to a de-escalation of tariff wars and heightened fears of a global trade slowdown.

And here at home UK investors have had no shortage of reasons to be apprehensive. The new Conservative administration of Boris Johnson has had its majority cut to just one – putting political stability on a knife edge. A Brexit no-deal outcome on October 31 looms ever closer. A headlong collision with the European Commission is now in prospect. And a tumultuous general election could deliver a hung Parliament – and the possibility of a Jeremy Corbyn-led minority government.

Little wonder there have been heavy outflows from funds in the Investment Association’s UK All Companies, UK Equity Income and UK Smaller Companies sectors. The £744 million pulled in June is the highest monthly redemption for more than a year, and takes the total withdrawn from UK equity funds since the Brexit vote to over £12 billion.

And figures from Morningstar show investors, led by Hargreaves Lansdown, pulled £164 million from Woodford’s smaller Woodford Income Focus fund, which remains open for dealing, in June.

Hargreaves Lansdown’s HL Multi-manager Income & Growth fund, which has a large position in Woodford’s suspended fund, was also hit by withdrawals, as investors pulled £102 million in June, according to Morningstar.

The Investment Association’s figures also show investors shunning active funds for passive tracker investments. Over the last three months, investors have ploughed £5.7 billion into tracker funds, while active strategies have suffered net withdrawals of £239 million.

Now it is at this point that seasoned investors look at the long-term chart of fund inflows and outflows with sharpened interest. For time and again, periods of investor outflows have proved a compelling “buy” signal for the market. “Look at where the crowd is going – and do the opposite,” has long been a truism for those brave enough to strike out against the tide.

Fund flow history would certainly suggest that buying when others are selling has paid off before. However, there is every sign that, given the huge uncertainty over Brexit and the highly febrile nature of UK politics at this time, we may not have reached “peak flight”, and the market – and investor confidence – have significantly further to fall.

At least one fund manager has already been caught by being too early. Peter Walls, manager of the £97 million Unicorn Mastertrust fund, opened a position in Woodford Patient Capital Trust (WPCT) earlier this year. In June, after shares in WPCT tumbled 27 per cent, he bought more shares. But WPCT continued to fall, dropping a further 15 per cent last month – this on news that Woodford had sold more than half his stake in the trust for more than £1 million.

Now there is talk that the WPCT board may replace Woodford with a new fund manager, or opt to wind down the trust and give shareholders back their money, which may help to rescue investors like Walls.

Woodford has now raised more than £650 million through the sale of shares across all his funds since the suspension of Woodford Equity Income. But the worry is that the longer that shares in Woodford Equity Income remain suspended, the greater the rush for the exits when investors are able to resume dealings.

So: Woodford woes, Trump on the tariff war offensive, an economy contracting – and the chaotic cacophony of a no-deal exit, a government defeat and a general election: there may be buying opportunities in the period ahead, and for those prepared to take a long view, a respectable case for drip-feeding money into the market in regular monthly amounts. But expect the flight for the hills to intensify before investor confidence has any grounds to stabilise.