Brexit places £560bn outflow risk on asset managers

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European investors hold €675bn (£567bn) in UK-domiciled funds and could allocate it to continental alternatives if the Government fails to secure passporting in its Brexit negotiations with the European Union, Fitch says in a new report.

The ratings agency has set out the outlook for the UK under Brexit three scenarios, with the worst-case being that the UK leaves the European Union in early 2019 with no trade deal in place. In this scenario tariffs fall to the WTO schedule and passporting is lost.

UK asset managers could face ratings downgrades as costs increase and revenues come under pressure.

The alternative scenarios examined include a deal that transitions into a free trade agreement over five years and the best-case scenario which includes extensive single market access, whereby passporting is retained.

The reports examines all areas of the economy, including bank capital, sovereign debt, corporate disruption and university talent and rankings.

The WTO scenario, Fitch says UK-domiciled asset managers face “severe” outflow pressure.

It points out 40 per cent of £5.5trn assets under management is from overseas investors and continental European investors own around half the €1trn in UK-domiciled Ucits and €354bn in UK AIFs.

The report states: “This implies “at risk” assets under management of around €675bn, combined with potential institutional outflows if continental European institutional investors allocate mandates away from UK investment managers in favour of continental Europe-based investment managers.”

Revenue pressure from reduced assets would come as UK-domiciled managers face costs associated with meeting post-EU requirements, including relocating operations or expanding existing offices.

Fitch says costs would likely be manageable for large managers with established European operations, but warned of firms consolidating or exiting the industry. In particular it said UK investment managers may be acquired by overseas corporates.

Fitch says it did not envision ratings downgrades for asset managers in the transition to an FTA agreement, but said funds investing in less liquid securities would be vulnerable. It says Mifid II and the rise of passive investing were likely to play a more central role in the UK and European asset management industry than Brexit in this scenario.

If the UK were to retain passporting and a significant amount of single market access, Fitch says market volatility during the negotiations would be the biggest impact for the investment management industry. This could provide opportunities for active management to outperform, the report says.