The UK funds industry has racked up billions of pounds of fund outflows to offshore centres this year due mainly to Brexit uncertainty.
Figures for outflows between January and the end of July show that £11.7 billion of money left UK-domiciled funds and went into offshore funds mainly in Ireland and Luxembourg.
Calastone – which calculated the figures based on millions of predominantly UK retail investor decisions that pass through its transaction network – blamed an increase in the rhetoric around a no-deal Brexit.
July – a month when no-deal Brexit talk ratcheted upwards as a government leadership contest took place – saw a “huge jump” in the flow of capital into funds based outside the UK’s regulatory reach. £2.8 billion flowed offshore in July – more than April, May and June combined – and mainly into funds based in Dublin and Luxembourg.
More broadly, the fund flow figures also show “dramatic” outflows from equity funds in general, and a related drift towards passive funds.
UK equity funds were hardest hit, accounting for £410 million of the total £1.3 billion of outflows from UK-domiciled funds during July.
Investors shed £1.8 billion of their active equity funds during the month, described as “by far the biggest monthly outflow ever suffered by this category”. One quarter of this came out of active UK equity funds, with income funds contributing almost one fifth. No category of active equity fund escaped outflows, Calastone said.
Index funds, by contrast, saw £526 million of inflows with no index category seeing outflows.
Asia and emerging market equity fund sales in the UK remained resilient in July. Other riskier asset types such as commodity funds, alternatives and real estate also saw outflows and investors sought out the relative safety of fixed income (£1 billion of inflows), money market and mixed-asset funds.
Calastone said investors had been adding to their UK equity fund holdings recently as MPs voted in the spring to rule out a no-deal withdrawal from the EU. But now that no-deal is “considered by many to be official government policy”, there was a flood of withdrawals from UK-focused funds, including the equity income sector, which is dominated by funds investing in UK equities and which saw £333 million of outflows.
Edward Glyn, Calastone’s head of global markets, said: “In periods when an orderly exit has looked ever more likely, investors have bought undervalued UK-equity funds. But they pass judgement swiftly when the no-deal rhetoric ramps up.”
He added that active funds were the “big losers” in current market conditions.
“Not only has active fund management suffered some reputational blows of late, but active funds are increasingly becoming a discretionary choice among investors, while passive funds are cementing their position in regular savings plans.
“This means active funds are increasingly likely to shoulder more of the outflow burden when investor sentiment turns negative.”
Calastone’s Fund Flow Index captures over a million buy and sell orders each month, but the orders are aggregated, typically from platforms, and so can reflect many millions of investor decisions.
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