Mutual Funds and the Brexit Vote – Two Years On

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 Lipper classifications popular with U.K. investors,  particularly equities:

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

Source: Lipper, Lipper 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.

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:

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

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.