Executive Summary

Pretty much everybody expected a recession in 2023. And pretty much everyone was wrong. But that pessimism has been reflected in fund flows.

Using FTSE indices as market benchmarks, in sterling terms the US led equity market returns over the year, of course, propelled upwards by the Magnificent Seven, followed by global indices for much the same reason. Somewhat surprisingly, perhaps, given the noise around the latter, FTSE Europe ex-UK beat FTSE Japan by 15.69% to 13.26% on a total return basis in sterling terms. The FTSE 100 delivered a relatively lacklustre 7.93%, though still outperforming broad emerging markets.

The 10-year gilt yield finished more or less where it started, at about 360 basis points (bps)—wandering between lows of 300 bps and highs of 474 bps—as investor sentiment as to the trajectory of inflation and base rates caromed around like a bungee-jumping pachyderm, from one inflation print or rate announcement to the next. That said, we still experienced less fixed income and money market volatility than in the wake of the September 2022 mini-budget, which UK investors spent most of 2023 digesting, and gave birth to the wonderful piece of investment jargon—“moron premium”.

Aggregate flows were in the red to the tune of £57.4bn. However, £39.5bn of this were redemptions from money market funds (MMFs), meaning long-term asset funds shed £17.9bn.

Bond funds saw the largest inflows, attracting £10.6bn.

Passive bond funds alone saw inflows of £18.2bn.

Equity funds suffered outflows of £23bn. UK equities once more bore the brunt of this, with Equity UK, UK Income, and Small and Mid-cap seeing a combined £23.9bn of outflows.

Mixed-Assets GBP Aggressive funds were the most popular classification, attracting 16.3bn, despite their Balanced and Conservative peers experiencing significant outflows.

Sustainable funds attracted £15.26bn over the year, as equities saw the biggest sustainable inflows of £12.25bn.

Asset Class Overview

Chart 1: Asset Class AUM by Year, 2004-2023 (£bn)

Source: LSEG Lipper

Over the 20 years covered by Chart 1, total net assets (TNA) held in UK mutual funds and ETFs have risen from £345.14bn to £2.13trn, or a 618% increase. By way of comparison, UK GDP rose from $1.42trn to $3.17trn, or 223%.

The £2.13trn was up from £2.05trn the previous year. 2022 was the first fall in TNA since 2018, and of greater magnitude, and 2023’s rise in assets was not enough to recover the previous high of 2021. So, the cost pressure that asset managers experienced with the decline in assets in 2022 has been relieved… but only a little. Pressures to consolidate and save costs are still very much front and centre.

The largest portion of this (46.6%) is invested in equity funds: £994bn, up from £931.4bn the previous year. Mixed-assets funds follow, with total net assets of £436.4bn (20.5%), up from £413bn, followed by bonds (£369.8bn, up from £332.4bn).

Chart 2: Asset Class AUM by Year, 2004-2023 (%)

Source: LSEG Lipper

Bond funds saw the largest year-on-year increase in TNA, at 111.2%. Equities (106.7%) and mixed assets (105.7%) also saw overall increases, though the former was entirely due to growth, as there were significant flows from the asset class (Chart 3).

Asset classes that saw TNA falls were alternatives, at 85.9% of their 2022 values, real estate, 84.8%, with the greatest fall being for commodity funds, which were just 52.5% of their 2022 values.

Over the longer term, it’s clear that there have been significant changes in the asset mix, with equity funds going from 65.55% of the total to 46.63%. That still makes it the largest asset class, but much diminished. The main beneficiaries of this shift have been mixed-assets funds, which have gone from 10.3% to 20.47%, and MMFs, which went from 6.62% to 12.96%, though peaking in 2011 at 16.48%. Perhaps surprisingly, given the shift away from equities, bonds as a proportion of assets haven’t seen much movement, going from 15.31% to 17.35%. They peaked in 2012, at 20.65%, and have edged down since, likely because of unattractive yields until recently. Given changing conditions, and extrapolating from the trends in Chart 3, it wouldn’t be surprising to see the proportion of fixed income assets increase over the coming period.

Real estate funds trended upwards, from 1.83% of the total in 2004, topping out at 2.53% in 2016, then headed inexorably downwards to 0.82% in 2023.

Chart 3: Asset Class Flows by Year, 2004-2023 (£bn)

Source: LSEG Lipper

Some £57.45bn was redeemed from UK funds in 2023—the largest on record. However, excluding redemptions from MMFs, that shrinks to £17.9bn—the second largest outflows from long-term flows—with the largest being £44.92bn in 2022.

The largest outflows were from MMFs, at £39.55bn, followed by equities, which saw £22.97bn redeemed. It’s clear from the chart that this marks the second consecutive annus horribilis for the asset class, with £56.85bn heading out the door over the period. Alternatives (-£3.86bn), real estate (-£2.15bn), and commodity funds (-£444m) were also in the red zone for 2023.

The main beneficiaries have been bond funds, which netted £10.56bn, as investors both topped up allocations resulting from the asset class’s heavy losses the previous year and also sought to take advantage of the enhanced yields this had ushered in. Otherwise, it was only mixed assets that stayed in the black, attracting £975m over the year.

For full report, please click on icon to the right.