Beleaguered UK equity funds in the Investment Association universe present "cracking" opportunities for long-term investors, according to several investment professionals, despite the fact they suffered their largest-ever recorded sell-off during June this year.
According to the latest Fund Flow Index from Calastone released last week, UK equity growth and income funds saw respective outflows of £679m and £671m throughout last month - both of which mark the highest ever outflows seen across both sectors including during the referendum, Brexit, the lead-up to the General Election and the onset of the pandemic.
Data shows that, while investors piled into UK equity funds during April and early May, June saw them cash in their profits and opt for money market and fixed-income funds, after the FTSE 100 index rebounded by 19.1% during the eight weeks after lockdown was announced.
While this trend was experienced across the globe as markets U-turned en masse, the UK funds bore the brunt of the outflows.
Juliet Schooling Latter, research director at Chelsea Financial Services, said this was predominantly because the FTSE 100 is a "value index dominated by oil, miners and banks", which have been "unattractive and underperforming for the past few years".
"The outlook for these companies is also unlikely to improve in a weak economy or recession," she explained. "The other main issue at play is the huge amount of cancelled dividends. We are such an income-focused market that overall cuts of 40% are also putting investors off."
Ben Yearsley, co-founder of Fairview Investing, added: "Do not forget how much technology has driven the US market and that many smaller sectors have lagged."
Paul Angell, investment research analyst at Square Mile, added that high-level headwinds also remain such as the "continued overhang of the UK's withdrawal from the European Union", while Liontrust's head of multi-asset John Husselbee noted the "poor global perception of how we are dealing with the pandemic".
Despite the torrid combination of headwinds facing UK equity funds, many fund buyers and multi-asset managers believe they offer more compelling investment opportunities than their developed market counterparts.
Husselbee - who scores countries between ‘one' and ‘five' in terms of value for money when considering regional weightings across his portfolios - has scored UK equities between a four and a five - which means they are "cheap to very cheap", while top-performing US equities have been given a rating of two.
"UK funds have largely been suffering outflows since June 2016 - after the EU referendum," he said. "If there is one thing markets hate it is uncertainty, and this is certainly a ‘push' factor. But I don't think the real story is money coming out of the UK, as much as it is money going into the US at the cost of the rest of the world, and the UK is contending with more uncertainty than other markets."
Helen Bradshaw, portfolio manager at Quilter Investors, said the UK market still has "valid place within a portfolio" from an income perspective, despite the recent slew of dividend cuts.
"While the overall level of yield from the market will be lower going forward, a number of companies are seeking to return to the dividend list as soon as possible," she pointed out. "In addition, the current crisis has allowed many companies to reassess their policies and payout ratios."