Brexit: IA says currency saved UK retail funds as sales tanked

Currency falls have masked the flight of retail money from UK-based funds during 2016 as assets under management, breaking £1trn, the latest annual industry report from the Investment Association shows.

Total AUM, including institutional, grew 20 per cent to £6.9trn. That level of growth compares to an 8 per cent average over the last decade, but overseas money appreciating in sterling terms has driven much of the increase. The IA says around 70 per cent of equities and 40 per cent of bonds held by UK managers are held in other currencies.

The pound is approximately 13 per cent lower now than it was on the eve of the referendum on a trade-weighted basis.

Retail funds under management grew 13 per cent to £1.1trn at the end of 2016, but significant outflows from equity and property in the period immediately after the UK’s referendum to leave the European Union led to total net sales over the year of just £4.7bn.

“That has reversed dramatically in 2017 so that is not a trend we’re seeing,” says Investment Association senior research analyst Ruth Meade.

Head of research and statistics Anastasia Petraki says it remains to be seen whether this effect could play out again if Brexit negotiations show signs of deteriorating or the UK exiting the EU without a deal.

The UK Government confirmed on Tuesday that it has jointly agreed with the European Commission to delay the fourth round of negotiations by a week so that they will now resume on 25 September.

Petraki says bigger questions are currently playing on asset managers’ minds, such as business models and delegation. In June, Esma issued guidance warning investment managers against taking a “letter box” approach to establishing an EU27 presence following Brexit.

“Frustration is probably a very strong word, but there is an ongoing uncertainty of what [the UK’s exit from the EU] is going to look like in 2019,” says Petraki. “Because no one knows everyone has put many things on hold. We just wait to see and the same thing goes for the regulator as well.”

Meade says the Investment Association has also been speaking with asset managers about staffing in their Brexit conversations with some workers raising concerns about what the referendum means for their employment.

The terrible year for retail sales breaks an upwards trend in retail trends since the global financial crisis.

“Individuals were finding it much more difficult to find returns from savings and banks and building societies, so potentially they were looking at investing in funds as an alternative way to find some returns,” Meade says.

Active equities drop from allocations

The IA reports a drop in allocation to equities over the last decade and also says funds are increasingly likely to be placed in passive products in this asset class.

However, asset allocation to a category termed “other” by the industry body has grown steadily over the same period. “In the retail market it might be what we call solutions based funds, an absolute return strategy or a mixed asset fund that’s looking to achieve a very specific outcome,” Meade says.

Institutional money into the asset class is also increasing and members expect the trend to continue, Meade adds. Its assets increased 21 per cent in 2016.

Three quarters of assets are actively managed, while 25 per cent are in passive products.