July 3, 2018

Mutual Funds and the Brexit Vote – Two Years On

by Jake Moeller.

We have just passed the two-year anniversary of the “Brexit” vote, and we are now heading into another crucial week. British Prime Minister Theresa May meets with her cabinet on Friday to finesse further details of the U.K.’s imminent departure from the European Union.

From a mutual-funds perspective there certainly are potential material impacts on how the U.K.’s current fund passporting arrangements will be accommodated (or otherwise) in the new relationship with the EU. Fund houses are undoubtedly hoping for some clarity on this soon.

Performance

Despite the uncertainty around Brexit for U.K. firms, the two-year period since the initial vote has coincided with strong performance of funds in Thomson Reuters Lipper classifications popular with U.K. investors,  particularly equities:

Lipper Global Classification % Growth 24/06/2016 to 19/06/2018 (in GBP)
Lipper Global Bond GBP Corporates 7.5
Lipper Global Bond GBP Government 3.0
Lipper Global Bond GBP High Yield 8.1
Lipper Global Equity Europe ex UK 34.8
Lipper Global Equity UK 30.7
Lipper Global Equity US 42.2

 

Fund Volatility

Fund volatility (as measured by the daily rolling ten-day standard deviation) of Lipper fund classifications popular with U.K. investors has declined markedly from the date of the Brexit vote, never returning to the original spike of late June 2016 (see chart below).

Exhibit 1. Daily rolling 10-day volatility of Lipper Fund Classifications

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Source: Thomson Reuters Lipper, Lipper for Investment Management

The inflation-led correction in U.S. markets from February 2018 can be clearly seen, but by comparison has caused less disruption–especially in bond fund volatility–than has the Brexit vote. This may be a signal that Brexit has now fizzled from a global news item into a particularly local event.

Lipper Global Classification % change in rolling 10-day volatility (1/7/2016 to 19/06/2018)
Bond GBP Corporates -62%
Bond GBP Government -69%
Equity Europe ex UK -25%
Equity UK -76%
Equity US -76%

 

Fund Flows

It’s difficult to interpret fund flows in the context of a single geopolitical event such as Brexit because of the myriad factors that determine investor preferences. From the end of June 2016 to the end of May 2018 estimated net flows into U.K.-domiciled funds are £55.4 billion. This can be considered a reasonable figure and is proportionally commensurate with pan-European flows.

Global equity funds have certainly been winners, likely supported by strong performance. Interestingly, however, there have been net outflows from U.K. equity funds and U.K. equity income funds, despite robust performance (some of which is undoubtedly attributable to the fall in Sterling since the vote). Global equity income funds too have suffered outflows perhaps as many popular “bond proxy” stocks become more expensive and investors buy into the global growth story.

The ten top Lipper global classifications ranked by estimated net flows (£m) are:

Equity Global £20,405
Money Market GBP £10,066
Bond Global £9,587
Equity Global ex UK £6,448
Mixed Asset GBP Aggressive £4,237
Absolute Return GBP High £3,562
Bond Global High Yield £3,083
Bond GBP Government £2,653
Mixed Asset GBP Balanced £2,551
Mixed Asset GBP Conservative £2,288

 

The ten bottom Lipper global classifications ranked by estimated net flows (£m) are:

Equity UK Income -£11,793
Equity Global Income -£5,443
Equity UK -£3,939
Absolute Return GBP Medium -£2,419
Equity Sector Real Est Other -£1,460
Equity UK Sm&Mid Cap -£1,404
Bond EUR Corporates -£856
Real Estate UK -£821
Bond GBP High Yield -£634
Alternative Equity Market Neutral -£472

Fund Launches

For many fund managers the aforementioned uncertainty surrounding passporting has caused them to consider solutions to ensure they will be able to sell their product suites throughout Europe.

In the two years since the Brexit vote there have been 309 U.K.-domiciled funds launched and 307 Dublin-domiciled funds registered for sale (RFS) in the U.K. launched (primary funds only). Interestingly, the latter figure actually represents a 25% decrease from the number of Dublin-based RFS U.K. funds launched in the two years before the Brexit vote.

Anecdotally, I would have expected the number of Dublin launches of funds registered for sale into the U.K. to be proportionally higher, but as with all things Brexit, interpreting numbers can be as difficult as reading tea leaves.

 


Thomson Reuters Lipper delivers data on more than 265,000 collective investments in 61 countries. Find out more.

Disclaimer: 
This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice. 

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