Fund flows into equity funds have remained firmly negative in 2026, with UK investors withdrawing a net £1.61bn in July alone.
The 12-month run rate of outflows has reached a record £13.9bn.
According to Calastone, UK-focused equity funds bore the brunt of the selling, with £948m withdrawn in July as uncertainty over the direction of UK economic policy and taxation weighed on investor confidence.
The cumulative impact on UK-focused equity funds has become increasingly difficult to ignore. Since June 2020, £52.6bn of cash has left the sector and only four individual months have seen any capital flow back in.
Actively managed equity funds were the target for much of the outflow, totalling £3bn in July and marking the third-worst month on record for active strategies.
Against this backdrop, the Pension Schemes Act, which received Royal Assent on April 29, was presented by some as part of the solution.
Early drafts contained reserve powers allowing ministers to influence pension fund allocations towards so-called “qualifying assets”.
The term was deliberately broad but the legislation ultimately covered asset classes including infrastructure, private equity, venture capital, private credit and unlisted equity securities.
As so often, the instinct to intervene, to add rules and direct capital by policy rather than by merit seemed set to prevail.
What began as a debate about how to increase pension investment in productive UK assets risked evolving into a framework for government-directed capital allocation towards illiquid and private-market investments.
That matters because investment in private assets and investment in UK public markets are not the same policy objective.
There is also a more fundamental question. If one of the problems policymakers are trying to solve is the decline in UK public-market investment, directing pension capital towards infrastructure and private markets does not necessarily address it.
The two objectives may be complementary but they are not interchangeable.
The concern was that “qualifying assets” could encompass a broad range of government-prioritised sectors or projects, potentially allowing pension capital to be directed according to policy objectives rather than solely according to returns.
Following significant opposition from the pension industry and the House of Lords, these powers were substantially curtailed before the legislation became law.
While the Government technically retains a reserve power to mandate investments, it is now heavily constrained as well as time-limited and the Government has said it does not currently expect to use it. This is a welcome outcome.
There is, at first glance, a certain logic to mandation.
If pension savings benefit from tax relief, why shouldn’t some of that capital support the domestic economy? The argument is appealing but flawed. Capital is neither patriotic nor ideological. It is pragmatic. It flows to markets where risk-adjusted returns are most attractive.
More fundamentally, mandation risks subordinating investment discipline to political objectives.
Pension assets should be allocated on investment merit, not policy preference, otherwise we risk making suboptimal allocations, delivering lower returns for savers and accelerating the very decline in UK fund flows that policymakers are seeking to reverse.
The problem is that weakening flows are neither recent nor cyclical. They are the product of decades of structural change.
In the 1970s, UK pension funds were major investors in equities, with a substantial proportion of their assets in UK-listed companies. Today, exposure to UK equities has been significantly diminished.
Several forces lay behind this shift: changes to the tax treatment of dividends altered the relative attractiveness of UK equities for institutional investors while the move from defined benefit to defined contribution schemes transferred decisions to individuals who have generally favoured global diversification.
Ageing pension populations in defined benefit schemes and regulatory reforms have meanwhile pushed pension funds toward lower-risk, liability-driven strategies and bonds.
Solvency II, introduced in 2016 to strengthen the resilience of Europe’s insurance sector, may also have reinforced the broader shift away from equities by making them relatively more capital-intensive to hold and incentivising insurers towards bonds and lower-risk assets.
While not the sole driver, it is widely regarded as having contributed to the long-term shift away from equity investment and towards fixed-income securities.
Meanwhile, global capital markets have deepened, offering broader and often more attractive opportunities, particularly in the United States, as the UK’s share of global equity indices has steadily declined.
The combined effect has been a structural decline in the share of domestic capital allocated to UK markets.
Against this backdrop, the case for mandation gained traction: an approach that effectively says “if you won’t invest in the UK, we will make you”.
Mandation has many practical problems. Defining a “UK investment” is not straightforward. Is it where a company is listed, headquartered or generates revenue?
Many UK-listed firms earn the majority of their income overseas. Forcing capital into “UK-listed” assets, for example, risks concentrating exposure in globally driven businesses without meaningfully supporting the domestic economy.
Meanwhile, the universe of investment opportunities has expanded dramatically.
The rise of ETFs and other low-cost index funds has made global diversification easier than ever. Investors now have access to a wide range of markets and sectors and so attempts to constrain or redirect capital could ultimately become more symbolic than effective, with a risk they will encourage workarounds or distort investor behaviour.
Ultimately, this debate should focus on the deeper issue.
The decline in UK fund flows is not primarily a failure of investor behaviour. Rather, it reflects the UK’s relative attractiveness as an investment destination. The public equity market has seen a shrinking pipeline of high-growth companies, a subdued IPO environment and persistent valuation discounts relative to international peers.
From this perspective, capital is behaving rationally.
Over recent decades, the US has outperformed the UK on growth and productivity and has been home to a much larger number of globally dominant, high-growth companies. It is therefore logical that investors have increased their overseas exposure.
Capital does not simply flow toward what appears cheapest, it flows toward markets where investors have the greatest confidence in future earnings growth, market depth and the ability to compound returns.
Going down the mandation route risks addressing the symptom rather than the cause. Mandating or nudging capital into domestic assets does not make those assets more attractive. If anything, it may signal a lack of confidence in the market’s ability to compete on its own terms.
However, none of this is to suggest that the objective of supporting UK growth and investment is misplaced. The challenge is determining the most effective way to achieve it.
Today’s fund flow challenges are the result of decades of policy, regulatory and market developments. Any serious attempt to reverse them must begin by addressing those underlying causes rather than compelling investors to behave differently.
If we are serious about improving capital flows into UK markets, we must first make the UK a more attractive place to invest – and that means improving competitiveness through taxation, regulation, market structure and the broader conditions for growth.
Dru Danford works in investment banking in London