The referendum on EU membership is over and the effects on the UK political landscape have already been considerable.
There will undoubtedly be implications for flows into UK-domiciled mutual funds over the coming months.
Prior to the referendum, news flow had generally highlighted the material impact the uncertainty was having.
In May, the recent Bank of America Merrill Lynch Fund Manager Survey showed not only a significant increase in cash holdings but a 16-percentage-point drop in allocations to UK equities – the lowest point since 2008.
Weakening sterling and widening spreads will present a number of new challenges and opportunities for these asset classes. Jake MoellerIn June, figures from the Bank of England revealed £65bn of UK assets being sold in March and April 2016.
More specifically, on UK-domiciled mutual funds, data revealed an overall drop of 7 per cent in the value of assets across all Lipper classifications and estimated net outflows of £37bn for the 12 months to May 31.
The largest classification by composition, Equity UK, with 13 per cent of all UK-domiciled funds, has suffered a yearly estimated net outflow of £6.7bn. Year to date it has experienced outflows of £4.2bn. The more defensive Equity UK Income category didn’t fare much better.
With 8 per cent of UK domiciled assets, it has suffered estimated net outflows of £1.8bn in the year to May 31. Equity Europe ex-UK also suffered estimated net outflows of £3.5bn during the same period.
The Bond GBP classification has been badly hit as a proportion of its overall size in the UK market. With 6.5 per cent of assets overall, it has suffered nearly £4bn of estimated net outflows to the end of May 2016, without a single monthly net inflow for the year. This pattern is similar in the Bond GBP High Yield classification.
Although this appears to have been a trend already established before the referendum date was announced, weakening sterling and widening spreads will present a number of new challenges and opportunities for these asset classes.
On the other side of flows, there has been a trend towards investments into Absolute Return and Flexible categories – with investors perhaps seeing this as a potential solution to the market volatility.
The Absolute Return GBP Medium and Absolute Return GBP High classifications have topped the flow charts over the past 12 months, with more than £6bn estimated net inflows between them to May 31. This is despite the average return of both these categories over the past 12 months being negative.
We now know the outcome of the vote but uncertainty will prevail for some time to come. While it is impossible to attribute mutual fund flows to any single determinate, there is some evidence that the risk aversion seen since the August correction last year has been extended by the referendum issue.
Monitoring the progress in the UK market over the next few months will be an interesting exercise. Long-term asset allocation models will still need to be populated with risk assets and this will be juxtaposed against shorter-term risk aversion, which will likely continue.
The Money Market GBP classification has collected £1.6bn of estimated net inflows in the five months to May 31. Clearly some investors have been keeping their powder dry.
Jake Moeller is head of UK and Ireland research at Thomson Reuters Lipper