Thursday, November 21, 2024

UK fund withdrawals reach largest on record amid Budget panic

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Chancellor Rachel Reeves delivered the UK Budget last week.

UK equity fund withdrawals reached their largest on record in October as investors pulled billions out of markets to escape tax rises in the Budget.

Investors sold a £2.7bn stake in funds throughout the month in anticipation of Chancellor Rachel Reeves hiking capital gains tax, up from £564m of withdrawals in September, according to data from Calastone.

“Unease in September meant the early birds took fright first, but by October investors were flocking for the exits,” said Edward Glyn, head of global markets at Calastone.

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With sell orders surging 36 per cent month-on-month, Glyn credited the rush to fears of a “capital gains tax grab”, with investors seeking to book in their profits and crytallise a lower tax bill.

The top rate of capital gains tax was hiked from 20 per cent to 24 per cent in the Budget, though this was far below the suggested 39 per cent that had caused panic amongst City investors.

Following the Budget on 30 October, sell orders dropped 40 per cent overnight as capital gains tax hikes took effect.

UK-focused funds bore the brunt of the selling as UK equity funds lost £988m during the month, but every equity-fund sector saw outflows.

The poor performance from the UK was the fourth worst month on record, with the consecutive number of months with outflows now totalling 41.

“This shows the scale of negative vibes around the Budget and reinforces exactly why the government urgently needs to encourage investment in UK assets,” said Peel Hunt head of research Charles Hall.

Investors even pulled cash from global-focused funds for the first time in over two years, as the funds lost £263m.

US equity funds weren’t spared either, with investors taking out £135m in their first outflows in over a year.

“With US markets and global markets having risen strongly over the last year, this is a further indication that booking gains for tax purposes was a key motivation,” Calastone noted.

In contrast, bond funds reached their highest levels since June 2023 with £631m in new money, as investors expected a slowdown in cuts from the world’s central banks and higher government borrowing in the UK.

Money market funds, the classic safe-haven asset class – also saw higher inflows, rising to £402m in October.

“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,” explained Glyn.

Property funds continued their long streak of losses, with investors pulling £45m from them throughout October thanks to sell orders jumping from £55m to £76m.

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