Investors face currency risk as they flee UK equity funds

Money

UK equity funds suffered £350m of outflows in the latest monthly data from the Investment Association, but investors could be at risk if sterling manages to claw back some of the losses its seen since the Brexit referendum.

The latest IA figures show the asset class missed out on the surge of net inflows in February, which jumped more than tenfold from a year ago hitting £2.2bn, compared to £210m in February 2016.

The average net retail sales for UK equity over the previous 12 months has been negative £440m.

February figures showed equity investors instead favoured global funds (£257m), Japanese funds (£93m), and North American funds and European equity funds, which both saw £31m of inflows.

Tilney Group managing director Jason Hollands says investors may believe they’re making a defensive move by shunning UK equities in the lead up to Brexit negotiations, but they face currency risk if the pound regains some of its losses.

“If Sterling manages to claw back some of the ground it has lost over the last year, then UK investors who have deployed their weakened Pounds into overseas equities, especially at a time of historically stretched valuations, could be in for a nasty surprise further down the line,” says Hollands.

Rate rises or continued resilience in the UK economy could be a threat, Hollands warns, while noting the investment is split on the outlook for the currency.

“What we do know is that currency markets can move with extreme speed and brutality and therefore this will be an acute risk for UK investors buying overseas assets in the short to medium term.”

Investors turn to professionals for asset allocation

The IA data showed mixed asset was the best-selling asset class in February with net retail sales of £813m.

Mixed Investment 40-85% Shares in particular saw £303m of inflows, while Mixed Investment 20-60% Shares saw £164m in retail sales.

Alastair Wainwright, IA fund market specialist, says UK investors are seeking professional asset allocation skills during challenging economic times.

Wainwright says strategic bond funds saw strong inflows for the month for similar reasons as investors sought managers to invest across fixed income. The sector was the second most popular with £228m.

High Yield and Targeted Absolute Return rounded out the top five for most popular sectors enjoying inflows of £148m and £129m respectively.