Fund sales slumped by 72% in 2016, with investors withdrawing a total of £8.2 billion from equity funds, according to statistics from the Investment Association (IA).
Target absolute return (TAR) and money market funds benefited from a rush to safe assets, with the former being the best-selling sector with net retail sales of £5.1 billion over the course of the year. The latter saw a record-breaking £2.4 billion pour in, meanwhile.
In total, net retail sales amounted to just £4.7 billion in 2016, down from £16.8 billion in the previous year. Institutional sales fared better, with £8.3 billion invested compared to £5.6 billion in 2015.
Funds under management increased 12.5% year-on-year to £1.045 trillion.
Defensive decision backfires
The numbers reflect the uncertainty caused by events such as the UK's Brexit decision, with UK and European equity funds seeing combined outflows of £8.5 billion, and Donald Trump's victory in the US presidential election.
However, investors' decisions to take risk off the table and pile into the supposedly safer areas of the market turned out to be the wrong one as stock markets confounded bearish predictions and rose to end the year at record highs.
Ryan Hughes, head of fund selection at AJ Bell, says this misplaced nervousness shows the importance of taking a long-term approach to stock market investing.
Adrian Lowcock, investment director at Architas, adds: "Investors clearly chose to go defensive through targeted absolute return and money market funds. However, many investors were wrong footed.
"[Both the result of the EU referendum and US election] surprised, but what surprised more was the reaction of stock markets. With Brexit, the pound fell as expected but, after a short fall, stock markets recovered strongly. With Trump's election any sell-off was even shorter."
Even worse for these 'nervous' investors, as data from FE Trustnet for Money Observer, Moneywise's sister magazine, has shown a third of the funds in the TAR sector fell into the red last year.
The data shows that 30 of the 93 funds in the IA's TAR sector in fact lost money in 2016 – over 25% in the case of FP Argonaut Absolute Return.
Elsewhere, the lure of tracker funds continued over the course of the year, seeing assets under management hitting an all-time high of £141 billion as investors look to keep their costs down. See Moneywise's list of 20 tracker funds to use as cheap core holdings.
Mark Dampier, head of investment research at Hargreaves Lansdown, says another reason trackers have continued to make headway is because their performance reflects the very traditional asset allocation that so many active managers have rejected over the last few years.
"In other words, where active managers have become cautious far too early the result has been that over the period passive performance has often been much better," he explains.
The tracker funds listed in Moneywise's First 50 Funds performed better in 2016 than the active funds that we chose for the list.
Chris Cummings, chief executive of the IA, unsurprisingly took the positives from the stats, pointing out the UK asset management industry continued to grow strongly and provide value to investors, savers and pensioners across the world.
He adds that the growth in funds under management "represents a significant contribution to people's wealth and pensions, as well as the UK economy as a whole".
This story was originally written for our sister magazine, Money Observer.