Calastone fund flows data point to 'rush to exit' from UK equity as Brexit nears

Jonathan Boyd
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Calastone fund flows data point to 'rush to exit' from UK equity as Brexit nears

The latest monthly Fund Flow Index (FFI) data from Calastone, the global funds transaction network, point to a significant trend through July of UK investors selling their holdings at the fastest rate since October 2016 - something that it blames on the political upheaval and concerns around a no-deal Brexit.

The FFI data suggests a net £1.3bn (€1.4bn) outflow from equity funds, with trading volumes at record highs, and with funds focused on UK equity accounting for about half this outflow. Commodity, alternative and property funds also experienced outflows, as investors moved towards fixed income, money market and mixed asset funds.

Flows were also higher to offshore funds, defined as those "outside the UK's regulatory reach", with some £2.8bn heading this way in July - more than the combined flows for April-June. Most of this went to funds in Dublin and Luxembourg.

"The flow of funds offshore has shown itself to be extremely sensitive to Brexit-related news in the last three years, with each negative development succeeded by a big increase in capital flight. July was no exception," Calastone noted.

Edward Glyn, Calastone's head of Global Markets said: "Investors are increasingly nervous about the outlook for the world in general and the UK in particular and so are intent on reducing the risk in their holdings."

"UK-equity funds are bearing the brunt of the outflows. This can only be ascribed to the government's increasingly strident rhetoric over a no-deal Brexit, and the associated economic chaos investors expect it to unleash - at least in the short term. In periods when an orderly exit has looked ever more likely, investors have bought undervalued UK equity funds. But they pass judgement swiftly when the no-deal rhetoric ramps up. The outflow from equity income funds is part of this trend, though this also reflects negativity publicity surrounding the sector at present. Moreover, the flight of capital offshore is yet another sign of the impact Brexit is having on the UK funds industry."

"Active funds are the big losers under the current conditions. Not only has active fund management suffered some reputational blows of late, but active funds are increasingly becoming a discretionary choice among investors, while passive funds are cementing their position in regular savings plans."

"This means active funds are increasingly likely to shoulder more of the outflow burden when investor sentiment turns negative."

To calculate the FFI ongoing, Calastone analyses more than a million buy and sell orders every month. This tracks money from IFAs, platforms and institutions as they flow in and out of investment funds. But because a single order usually represents the aggregated value of a number of trades from underlying investors, for example, passed from a platform via Calastone to the fund manager, the index is reflecting the impact of many millions of investor decisions monthly.

More than two-thirds of UK fund flows by value pass through the Calastone network each month, and all such trades are included in the FFI.

Globally, the service provider claims some 1,800 customers in 41 countries and territories, processing some 9 million messages and £170bn of transactions monthly.

Jonathan Boyd
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Jonathan Boyd

Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope.