The UK market is enduring a death by 1,000 cuts, says SDL top manager | Trustnet

“Death by a thousand cuts” can refer to a form of torture and execution in Imperial China or a Taylor Swift song about heartbreak, but it’s also a fitting way of describing what UK managers have been feeling, trying to make money in a market that everybody snubs.

Whether he meant heartbreak or torture, the expression was chosen by Eric Burns, manager of the SDL Free Spirit fund (the small-cap sibling of SDL UK Buffettology), to describe his agony as UK-focused funds keep registering outflows.

“I’ve been in markets for just under 30 years and I can’t remember a more prolonged death by 1,000 cuts than we have just seen over the past two and a half years,” he said.

“What we are going through is probably the most severe bear market in the UK in a very long time. We UK equity managers feel that strongly.”

Over the past year, small-cap equity funds have reduced in size by one-third each month, declining from £14.5bn five years ago to £9.8bn currently, based on data from the Investment Association. This decrease is attributed to both outflows and poor returns, which have averaged a 15% loss over the past three years.

In 2024 alone, investors withdrew £3.8bn from UK equity funds, the latest Calastone report showed, turning managers such as Burns into forced sellers of assets. The natural turnover in the Free Spirit portfolio is about 2%, he explained, but because of sales initiated to meet redemptions, the statutory turnover figure is higher than that.

Free Spirit contained approximately £80m one year ago, but suffered “a fairly large drawdown”, Burns admitted, shrinking by £16.7m to £68.8m over the past 12 months, with its £5.1m performance gains failing to offset outflows.

That’s even more alarming considering that, at its peak in September 2021, its assets under management amounted to £131.5m. The manager attributed the sharp fall to today’s levels to a 50/50 combination of performance and walk-outs.

Indeed, the fund is down 9.4% over the past three years, one of the worst records in the IA UK All Companies sector, yet it remains a top-quartile performer over five years.

This doom and gloom was not enough, however, to worry the manager in the least about the fund’s size and, above all, its viability.

“Categorically, the fund is fine in its current size. It would have to become a third of what it is now before a viability question was even asked,” he said.

“In terms of flows, funnily enough, from when we’ve seen that small turn in sentiment towards the UK, they have been better in Free Spirit than in Buffettology, probably because the greatest undervaluation within the UK market is at that smaller and mid-cap end.”

Buffettology went from £650.9m in assets under management at the end of last year to £483.8 today, with a positive performance effect of £48.9m and underlying outflows of £216m since the start of the year.

There were encouraging signs recently in the market, however, giving Burns hope things could turn around before the final, one-thousandth cut.

“What I will say, is things have started to change for the better. They’re not brilliant, but they’ve got better with a definite mood shift in the past few months. That was reflected in our the turn in performance. And, of course, the great way of turning flows is to start delivering the performance.”

Performance of fund against sector and index over 1yr

Source: FE Analytics

Over the very short term, Free Spirit has re-emerged from the third performance quartile of performance against the IA UK All Companies sector over the past six months to the second quartile, which it maintained over three and one month, but it might be too soon to extrapolate from that.

Fund pickers have noticed a slight change in sentiment too and recommended funds and trusts to dip your toes back into smaller companies in this Trustnet feature.