UK investors are pulling out of equities at record rates. Is it time for a major push in financial education to secure our economic future?
As our regular readers know, the rules of successful equity investing are very simple: 1. Diversify, 2. Keep your costs low, 3. Invest as much as you can, and 4. Ignore the nose and stay invested.
Thankfully, 1. and 2. are now commonly accepted here in the UK. Indeed Britain leads the way in Europe in its preference for low-cost, passive funds. Sadly though, too many investors, including index investors, continue to struggle with 3. and 4. And, as it happens, UK investors struggle more than most.
According to the latest Fund Flow Index from Calastone, UK-domiciled equity funds suffered their worst month of outflows on record in October. Investors sold down a net £2.71bn of their holdings, with every category of equity funds seeing outflows, mostly in the last three trading days of the month. There were also large outflows in September.
“The startling change in behaviour (around) Budget Day,” a Calastone spokesperson said, “is a clear indication that tax was the main motivation for all this activity.”
A longstanding problem
True, concerns among wealthier investors about tax changes in Labour’s first Budget certainly played a part. Unease about the wisdom of deep rate cuts US and the prospect of higher government borrowing and spending in the UK were probably factors too.
But we mustn’t pretend that this lack of fondness for equities is a new phenomenon. Relative to equities, we Brits have been heavily exposed to cash and, of course, houses, for a very long time.
What’s more, it’s a trend that has intensified in recent years. A report in January from Morningstar showed how equity allocations have been steadily falling. Money market funds were the only category that saw inflows in 2023.
Pension funds have been similarly unenthused by equities. According to one report, UK pension funds cut their equity allocations from about 73% in 1997 to just 27% in 2021. Yet all this is despite the fact that, overseas, equity exposure has generally been rising over recent decades.
Make no mistake, this is a big problem. As ongoing analysis of historical investment returns by Elroy Dimson et al. has shown, equities have wiped the floor with cash and bonds in the long run. If you aren’t sufficiently exposed to them, the risk is that you will fail to achieve your investment goals. In the worst-case scenario, you will run out of money in later life.
What’s the solution?
Several suggestions have been made as to how to remedy the problem. Charles Hall, Head of Research at Peel Hunt, made a particularly strong case on a recent episode of the Adviser 3.0 podcast for giving people tax incentives for invest in UK equities.
Both Labour and Conservative politicians are in favour of the idea, which would, of course, have the added benefit of supporting home-grown businesses, the UK stock market and the domestic economy.
I’m certainly not against it. After all, it’s in all of our interests to see the UK thrive economically. For me, though, the best solution would be a concerted financial education campaign by the government, the regulator and the investing industry, with a particular focus on the benefits of investing in equities.
The success of the InvestSmart campaign, launched by the FCA in October 2021, has shown that it is possible to raise awareness and levels of financial literacy. But InvestSmart is primarily focused on younger adults, when those most at risk of financial hardship if they don’t invest more now are those in their 40s and 50s, and therefore have less time to benefit from compounding returns.
Also, funding for InvestSmart is a drop in the ocean — just £11 million over five years. The cost to the UK tax payer of having millions of people over the next 20 years unable to pay for their own upkeep in later life will be staggeringly high. It surely makes sense to invest more money now to help prevent that happening?
Lessons from abroad
I would also like to see the UK learn from investor education initiatives elsewhere in the world. One of the earliest measures taken by the first Obama administration, for example, was the launch of the Investor.gov website, in conjunction with the U.S. regulator, the SEC. An educational resource for new and seasoned investors alike, the platform has been accessed by more than 60 million Americans.
Investor.gov's latest initiative is Never Stop Learning, a campaign designed to encourage older investors in particular to learn — and keep on learning — about investing and protecting their financial assets. Recently, Spanish-language education materials have been produced, to try to address the fact that the Latino community is more distrustful of the financial system and less inclined to invest in stocks than the general population.
Of course, the new Labour government has other pressing priorities, as does the FCA, not least because of its new secondary responsibility to help promote the City. I would argue, though, that it’s not the City, with its vast lobbying and advertising power, that needs promoting so much as investing itself. If we don’t strongly make the case for buying and holding equities now, we’re surely storing up much bigger problems for UK governments in the future?
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