by Jake Moeller.
The British referendum on EU membership is fast looming on June 23, and there has been considerable debate on the impacts a potential “Brexit” might have on the U.K. funds industry.
Recent news flow has highlighted the effect the uncertainty the referendum is having on investor sentiment generally. In May the FT reported data from the most recent Bank of America Merrill Lynch Fund Manager Survey showing not only a significant increase in cash holdings but a 16-percentage-point drop in allocation to U.K. equities—to the lowest point since 2008. In June Investment Week reported figures from the Bank of England showing £65 billion of U.K. assets being sold in March and April 2016.
More specifically on mutual funds, examination of data on the U.K.’s Investment Association (IA) classifications (sourced via Lipper) reveals a drop of 6% in the value of total assets of funds in all IA classifications and estimated net outflows of £38 billion for the 12 months to May 31, 2016. January 2016 proved the worst month overall, with nearly £16 billion of net outflows that month alone.
Figure 1 Ten top IA sectors ranked by estimated net outflows (12 months to May 31, 2016 [£m])
The largest IA sector (UK All Companies), with some 12% of all IA assets, has suffered a yearly net outflow of £9.2 billion. In the last 12 months it has experienced only a single positive month of flows (July 2015).
The IA Sterling Strategic Bond sector has been worst hit as a proportion of its overall size in the U.K. market. With 4% of total assets overall, it has suffered nearly £12 billion of net outflows to the end of May 2016, without a single monthly net inflow for the year.
Of the diversified categories the conservative IA Mixed-Asset 0%-35% has proven most resilient, with £410 million of net outflows for the year to the end of May 2016. By contrast, the IA Mixed-Asset 20%-60% sector has suffered nearly £5 billion of net outflows for the last 12 months.
Figure 2 Ten top IA sectors ranked by estimated net inflows (12 months to May 31, 2016 [£m])
Only four of the IA sectors have experienced more than £1 billion of net inflows in the 12 months to the end of May: Property, Global Equity Income, Global Bonds, and Targeted Absolute Return. The latter sector has been the standout success story for the U.K. market for the last 12 months. It has collected nearly £10 billion of net inflows. This is despite the corresponding average fund return of the sector being a negative 0.6% over the same period.
It is difficult with market-linked investments to attribute any single determinant to their fortunes. Whatever the outcome of the British vote on June 23, 2016, examining the mutual fund flows in the U.K. market for the end of July will certainly prove a very interesting exercise.