MJ Hudson study shows that UK Government negotiating agenda does not align with the needs of UK fund managers or investors. Nor does it work for European managers and investors.
More than three quarters (77%) of UK fund managers believe that the UK Government should have consulted the asset management industry more before commencing Brexit negotiations, according to a new report from MJ Hudson, the independent asset management consultancy.
The report, based on a survey of more than 300 fund managers and investors in the UK, Europe and the rest of the world (ROW), also revealed that 80% of UK fund managers do not believe the UK negotiation team has sufficient understanding of asset management in order to deliver a deal that works well for the UK industry; 63% of global fund investors currently investing in the UK agreed.
Matthew Hudson, CEO of MJ Hudson, said: “Following the referendum result, which few in our industry wanted and fewer still expected, managers and investors alike are not waiting for the political vacuum to be filled. Instead, they are already implementing their own plans and setting up new EU offices and teams so that they retain and grow assets under management (AUM) post-Brexit, however it plays out.”
Significance to the UK asset management industry
The UK asset management industry is the second largest in the world, holding more than 36% of European assets, more than France, Germany and Switzerland combined. The Investment Association calculates that UK fund managers run approximately £5.7trn (at year-end 2015).
A publication from the London School of Economics expressed that, of the £24 billion revenues generated by UK asset managers, as much as £3bn could move outside of the UK post-Brexit.
Matthew Hudson added: “The ability to provide financial services from the UK into the EU is critical, not only to maintain the UK’s position as the leading asset management centre in Europe, but also as a world-leading industry for the UK and a significant revenue generator for its economy. As the UK Government and the EU now enter Brexit negotiations, it is not too late for the asset management industry in the UK and the EU to be extensively consulted.”
Significance to the EU and rest of world
Thousands of EU funds are available for distribution in the UK and any restrictive marketing and sales rules imposed by the EU on the UK are expected to lead to reciprocal treatment.
Camille Thommes, director general at Association of the Luxembourg Fund Industry (ALFI) echoed this view in the report: “[The negotiation process] is not a unilateral, one-way exercise. There is a lot at stake for both sides.”
Every single European fund investor outside of the UK surveyed by MJ Hudson was surprised by the Referendum result on 24 June 2016. European fund managers were only marginally more prepared – 86% had expected the UK to vote to remain in the EU. One Dutch institutional investor remarked, “[I am] stunned – I now have a negative view on allocating assets to UK asset managers. I’m looking for alternatives.”
The reaction from fund managers and investors in the rest of the world was also one of concern. A US wealth manager remarked, “I worry that others will follow similar paths.”
Matthew Hudson commented: “The Brexit results matter to everyone in asset management, not just those in the UK, but in the EU, too. This cuts both ways. There is uncertainty for European managers and investors outside the UK over whether they can access UK-based funds, as well as sell their own funds within the UK. Asset managers and investors throughout the EU and ROW mostly want to see transparency as well as the reciprocal flow of money and services being maintained. It is in no-one’s interest to take a giant step backward into protectionism as this greatly affects global capitalism, and investment choice especially.”
Meanwhile, only three of the UK Government’s twelve negotiating priorities were identified by more than half of UK fund managers as being beneficial to the UK asset management industry:
– Establishment of a free trade agreement with European markets (55%)
– Providing “certainty” throughout and after negotiations (53%)
– Maintenance of rights for EU nationals in Britain, and British nationals in the EU (53%)
Two thirds of the UK Government’s stated objectives failed to reach even a 25% approval rating from UK fund managers.
Unsurprisingly, in this context, the MJ Hudson study found that 76% of European fund managers and investors outside the UK are pessimistic regarding the UK Government’s ability to achieve a negotiated outcome that is acceptable to the UK asset management industry. This is much higher than those based in the UK (53% are pessimistic regarding the outcome) and those respondents based from the ROW (31%).
Uncertainty breeds inactivity… up to a point
One UK equity fund manager said the uncertainty and opacity from the Government around Brexit negotiations was troubling market participants more than the end result: “What bothers me the most is that it is improbable the industry is going to get full disclosure or updates of where it stands during the negotiations.”
Matthew Craig-Greene, managing director of Investor Relations and Marketing at MJ Hudson, who led the research, noted: “One of the biggest fears for European investors based outside the UK is the uncertainty surrounding the length and outcome of negotiations. This further supports a proactive strategy for fund managers.”
Matthew Hudson concluded: “The Brexit negotiations – how long they take and with what results – are uncertain. In the meantime, asset managers and investors are all active behind the scenes, future-proofing their assets under management and ensuring investment choice.”