The result of the EU referendum has surprised many analysts and investors. Undoubtedly, Brexit presents challenges to the European and UK funds industry. However, these may not be as material as people think.
According to Thomson Reuters Lipper data, there has been a considerable risk-averse reaction. The pan-European mutual fund market suffered net outflows of more than €20bn (£16.9bn) in June.
The month saw a massive inflow of funds into Dublin-based money market funds, with €14bn going into US dollar-denominated funds at the expense of European and global equity funds.
Despite these flow figures, equity markets have been surprisingly buoyant, with the MSCI World index reaching a five-year high in sterling terms. Short-term volatility for UK-domiciled funds has returned to pre-vote levels after almost doubling immediately after the outcome of the vote.
Of all the industries affected by the ramifications of Brexit, the mutual funds industry is one of those best placed to deal with the challenges.
Whatever comes of Brexit will be small fry in relation to the changes fund houses have already had to contend with since the financial crisisFor UK-domiciled funds, net outflows in June were nearly £3bn, with most of this coming from commercial property funds.
This sounds considerable but, by way of comparison, in the China-induced summer wobble last year, the UK fund market suffered net outflows of £11bn. During the oil price shock in January and February 2016, net outflows were nearly £16bn.
Fund houses constantly deal with such contrasting market dynamics – outflows in a rising market, inflows in a falling market and all combinations in between.
In 2008, the European fund market experienced nearly €600bn of outflows, but then collected €200bn in 2009. The Greek crisis in 2011 resulted in €100bn of outflows but more than €200bn flowed into funds in 2012.
Fund groups have endured myriad legislative reforms since 2009. Consider the acronym-heavy direct touchpoints: Mifid II, AML, KYC, Emir shareholdings. Indirectly, add Basel III, Solvency II, CRD, Dodd-Frank and AIFMD. Whatever comes of Brexit will be small fry in relation to the changes fund houses have already had to contend with since the financial crisis.
Many UK-based fund groups will have been inoculated by the Scottish referendum in 2014, which forced them to examine potential multi-region domiciles and operational bases.
For many years, fund houses across all domiciles have been getting fitter via the competition provided by a truly global and diversified industry.
The Brexit result will potentially see a short-term slowdown in new launches. Of the 350 UK-domiciled fund launches year to date, a significant proportion have been absolute return offerings. This may now be a saturated market.
In a lower-for-longer rates environment, fund groups need to ensure they can meet the demand for income. The investors flocking to Dublin-based money market funds in June won’t want to stay there for long.
The managed funds industry is dynamic, innovative and far more resilient than a local geopolitical event. June European fund flows don’t paint a particularly pretty picture but the industry has experienced much, much worse before.
Jake Moeller, head of Lipper UK & Ireland research at Thomson Reuters Lipper
