Equity funds dominated outflows in September, with investors pulling a net £2.4bn, as net retail sales of investment funds saw outflows of £3.4bn during the month, according to data from the Investment Association (IA).

Following positive net flows in July and August, September took Q3 net retail sales to a £1.2bn outflow, contrasting the £4.4bn inflow recorded in the previous quarter.

Outflows in September were heaviest in equities, driven by investor uncertainty about the impending Budget and capital gains tax (CGT) rate rise.

The only region to remain in inflow was North America, with net retail sales of £101m, down from £527m in August.

Bond fund net flows turned negative with outflows of £116m, following an inflow of £1.8bn in August, while mixed asset funds saw outflows climb to £534m from £192m in August.

The IA noted that September’s mixed asset funds data included record outflows from the mixed investment 40-85 per cent shares sector of £354m, as the prospect of CGT rises “impacted sectors targeting capital growth as investors anticipated an increased tax take on equity investments held outside ISAs and pension wrappers”.

Meanwhile, inflows to index tracking funds remained high at £1.7bn, although inflows were the lowest since October 2023.

Responsible investment funds saw record outflows of £604m, exceeding the previous record outflows of £541m in October 2023.

At the end of Q3, UK investor funds under management totalled £1.5trn, down by 0.5 per cent on the previous quarter.

“In September, investors turned their focus towards the impending Budget as speculation grew around how much the government would need to borrow and the tough decisions they would take on tax,” commented IA director, market insight & fund sectors, Miranda Seath.

“It was clear that CGT rises were almost inevitable, and this looks to be a contributing factor to a surge in outflows across equities, which has upended the tentative recovery of flows into the asset class in previous months.

“Global equities were particularly impacted, seeing their first outflow in six months. Outflows from UK equities remained consistent with previous months, although we did see a rise in outflows from the UK smaller companies sector, which could suggest worsening investor sentiment on the outlook for the UK economy.

“Investors have also been impacted by the uncertainty over Labour’s fiscal strategy, in the drawn out run up to the Budget. The ensuing rise in gilt yields shows that market reaction to the Budget has been mixed, but not as severe as in September 2022.

“In the longer term, and with the Budget now in the rear-view mirror, there does appear to be some clarity for investors, but only if the Chancellor is able to stick to her commitment to setting long-term and stable fiscal policy, and achieve growth, without raising taxes further.

“Looking ahead to the final quarter of 2024, Trump’s US election victory will be a more significant factor in the fortunes of markets around the world and investors will be watching closely.”

---