UK equities see first inflows in over a year as risk appetite returns

UK equity funds recorded their first month of net inflows in more than a year in December, signalling a potential shift in investor sentiment as risk appetite tentatively returned towards the end of 2025.

According to LSEG Lipper’s latest Everything Flows, UK report, UK equity funds attracted £535m of net inflows in December, marking their first positive month since November 2024 and only the second month of inflows since March 2022.

The turnaround came amid improving market momentum and a broader re-risking across portfolios, with investors increasing allocations to equities, bonds and mixed-asset strategies.

Total UK fund flows swung to £8.1bn of inflows in December, reversing heavy redemptions seen earlier in the quarter, as falling inflation, rising expectations of rate cuts and stronger equity performance encouraged a more constructive outlook.

Passive drives equity rebound

The recovery in equity flows was driven largely by passive strategies, which attracted £2.41bn, while active equity funds continued to suffer £1.48bn of outflows.

The dominance of passive suggests investors remain cautious, preferring broad market exposure rather than manager-specific risk, even as they tentatively rotate back into equities.

Across regions, investors favoured global and US equities, which attracted £3.1bn and £1.3bn respectively, reflecting continued confidence in US growth and technology-led earnings momentum. By contrast, sustainable equity strategies continued to face heavy redemptions.

Sustainable funds recorded £1.13bn of net outflows in December, driven primarily by £970m exiting sustainable equity strategies.

The trend underscores ongoing investor scepticism towards ESG-led investing amid geopolitical uncertainty, energy security concerns and renewed interest in defence and traditional energy sectors.

Sustainable bond funds also saw redemptions, though at a slower pace, suggesting that ESG fatigue remains most acute in growth-oriented equity strategies.

Fixed income regains favour

Fixed income funds attracted £2.3bn of net inflows in December, as investors positioned for interest rate cuts in 2026.

Demand was strongest for corporate bond strategies, particularly investment-grade, reflecting expectations of a soft economic landing and easing monetary policy. Government bond funds also saw modest inflows as falling inflation improved real yield prospects.

The return of bond flows supports the case for rebalancing multi-asset portfolios after two years in which cash and money market funds dominated investor allocations.

Cash remains dominant

Despite the improving appetite for risk assets, money market funds remained the largest single beneficiary of inflows, attracting £2.6bn in December and £23bn across 2025.

The persistent dominance of cash highlights lingering caution among investors, who continue to prioritise capital preservation amid geopolitical tensions and economic uncertainty.

However, the combination of falling rates and improving market confidence suggests that 2026 could mark a turning point, with capital gradually rotating out of cash and back into longer-duration assets.

Strategic implications for allocators

For multi-asset investors, December’s flow data suggests early signs of a regime shift — from defensive positioning towards selective re-risking.

The return of UK equity inflows, combined with renewed demand for bonds and global equities, points to a gradual rebuilding of diversified portfolios after a prolonged period of capital concentration in cash-like instruments.

However, the continued preference for passive strategies and the resilience of money market flows underline that conviction remains fragile.

As central banks pivot towards easing and earnings momentum holds, asset allocators may increasingly face pressure to reduce cash allocations and rebuild equity and duration exposure, but the pace of that shift is likely to remain measured rather than abrupt.