Investors retreat from US funds, but could soon return
Volatile US stock markets have spooked investors, but there are signs that US exceptionalism will return.
4th July 2025 11:48
British investors pulled money from North American equity funds in May, as US tariffs and a weakening dollar hurt sentiment towards American shares.
The data, from funds industry trade body The Investment Association (IA), marked the first net outflows from North American equity funds in six months.
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Investors withdrew £622 million, including a record £303 million from funds investing in smaller US companies, reversing April’s £962 million of inflows.
There are concerns that Trump’s trade policies will weaken the US economy. However, May was actually a strong month for US shares – the S&P 500 rose 5.5% in US dollar terms and about 3% in sterling terms.
Markets rose because they began to price in a reversal of Trump's high tariffs, as well as the possibility of international trade deals.
The IA said: “As concerns mounted over the impact of trade restrictions on the outlook for the growth of the US economy and inflation, raising the spectre of stagflation, investors sought to reduce their exposure to US equities.
“This follows inflows of £3.5 billion into funds investing in North America last year as the performance of US stocks soared in 2024. But in a more volatile environment for US equity performance, investors have sought out global diversification and European equities to re-adjust portfolios away from the US.”
However, there are signs that European investors are returning to US funds. Fund data firm Morningstar says that “after months of scepticism, fund flows suggest that confidence may be returning – albeit cautiously.”
It found that in May and June, net flows into US equity funds from Europe-based investors turned positive, after recording outflows in April.
The IA data also showed a record monthly outflow (£525 million) from the Global Emerging Market sector, showing that investors are reducing exposure to regions that may be adversely affected by the impact of tariffs, according to the IA.
However, in May investors put money into global and European funds. Flows to global funds (£558 million) lead equities and European (£435 million) equity inflows accelerated, as investors sought to rebalance their portfolios, shifting towards Europe as an alternative to US equities.
Overall, investors placed £2 billion into funds in May, up from £1.1 billion in April.
UK equity funds saw net outflows reduce to £348 million, the strongest month since August 2021.
Meanwhile, fixed income funds attracted £1.1 billion in inflows, reversing the £1.8 billion outflow recorded in April.
Investors strongly preferred the safety of government bonds in May, which have the highest credit ratings indicating the lowest risk of default.
UK gilt funds led the sales rebound with £453 million inflows, the highest since November 2023 (£584 million) and the second strongest month on record, followed by inflows into corporate bond funds of £315 million.
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