UK investors sold down UK-focused equity funds in January, causing the third largest outflows for 20 months despite strong market performance.

Investors withdrew a net £868 million. The difference between buy and sell orders was the largest for any fund sector, and not a single trading day saw net buying despite the FTSE 100 recently reaching an all-time high.

Calastone, a fund transaction network that reported the figures, said the UK's "ailing image" prompted the switch away from UK equities, along with the attraction of higher yields from bond funds.

Fixed-income funds recorded their second-highest inflow in January as investors added £1.23 billion to their holdings. The promise of higher yields and receding inflationary pressures justified the shift in investor preference, said Calatone. Over the last 12 months, inflows to bond funds stood at £3.84 billion, while outflows to equities stood at £6.62 billion over the same period.

Global equity funds and funds targeting other geographies also enjoyed inflows in January as world markets continued their rebound. Since 2015, investors have sold £7.3 billion of UK-focused funds, while global funds witnessed inflows worth £58 billion.

Edward Glyn, head of global markets at Calastone, said some rotation was taking place following a good 2022 for UK equities and that global funds are more likely to benefit from a return to bull-market conditions. The selling of UK funds has increased at the same pace as the buying of global funds.

The reopening of the Chinese economy sparked January inflows to equity funds focused on Asia-Pacific and emerging markets. Meanwhile, global stock markets had their second-best January in three decades, continuing the recovery trend since October 2022. Calastone reported that global funds with no ESG mandate garnered just under half the overall net inflow, reinforcing optimism on global equities rather than simply preference for the ESG factor.

Amid other factors affecting UK funds were political instability and "a sense of unstoppable decline", said Glyn.

But he added that confidence for global equities "may be premature". Although interest rates globally are still increasing and corporate earnings are coming under pressure - this is not yet fully reflected in global markets".

The most favoured bond funds in January were tilted to the higher quality end of the market – sovereign or investment grade corporate debt – suggesting investors were sidestepping riskier high-yield funds at present, Glyn added.

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