By Karen Kwok/ Morning Star
UK investors pulled £1.7 billion of European equity funds in July alone according to Morningstar data, as concerns about the contagion of Brexit spread to the European economy. Data from Morningstar Direct revealed European equity funds have recorded £4.7 billion outflows since the start of the year.
Investors also sold £1.3 billion of UK equity funds, the largest outflows for the sector since 2009. In third and fourth place for outflows, UK equity income funds and commercial property funds recorded £487 million and £435 million outflows respectively. These four sectors contain the assets most affected by Brexit risk – domestic stocks, stocks at risk of contagion and property.
Now for a Greek, Portuguese or Italian Exit?
The Brexit vote caused political instability and an economic upheaval in the UK that economists warn could spread to the rest of Europe. Eurosceptic parties are on the rise, increasing the challenges faced by governments, begging the question whether other European countries will follow the route of UK.
The Greek debt crisis remains unsolved, and banks in Europe face renewed pressures. Italian bank stock prices collapsed as a result of investor concerns over whether Italy would be the next to hold a referendum to leave the European Union. This act would destabilise the Italian banking system, Morningstar analyst Stephen Ellis said.
“There is lingering uncertainty about the impact of Brexit on investment and consumption spending in Europe and the UK,” said Jan Dehn, head of research at Ashmore, the investment manager group.
The Investment Association fund flow figures echo to Morningstar’s findings. Outflows of European and UK equity funds were way ahead of other sectors: Europe equity funds recorded £922 million while outflows of UK equity funds reached £1 billion in July 2016. The next in line was North America equity funds with £206 million outflows.
Investors sell fund houses that suspended property trades
Threadneedle, Standard Life, M&G, Henderson and Aberdeen top the largest monthly outflows list in July 2016. Investors sold £662 million of Threadneedle funds in July, the largest monthly outflows since July 2012. The asset manager recorded £1.2 billion outflows from January to July 2016.
Standard Life also recorded £651 million outflows in July and M&G saw £471 million outflows, while Henderson and Aberdeen saw £450 million and £445 million outflows respectively.
The above five fund houses with the largest July outflows are among the six fund houses that temporarily suspend trading of their open-ended property funds, due to liquidity issues triggered by Brexit uncertainty in early July. Impact of the suspension clearly affected investors’ confidence in these fund houses, as well as closed-end funds in the UK property sector which saw their values fall from a premium of 3.5% on May 24 to a discount of 3.7% on July 22.
M&G remains the most unpopular fund provider
Outflows of M&G funds have now reached £6.8 billion since the start of the year, topping the most sold fund houses chart.
Within the fund house, the Silver Rated M&G Optimal Income fund saw £3 billion outflows at the same period of time. This outflow figures extended the sell-off taking place in 2015, with around a 35% drop in assets over the past year, according to Morningstar analyst Ashis Dash.
Reasons behind 2015’s outflows include the European Central Bank’s policy to push yields lower, an anticipated Federal Reserve interest rate hike, collapse in energy market which affected US high yield in particular, Dash explained. The fund’s underperformance in the past two years also does not help.
“The fund was one of the largest funds within its Morningstar category that was widely held by European investors. European investors tend to be more sensitive to short term performance and thus a little more active in their asset allocation,” Dash said.
Yet despite these flow figures in 2016, the fund has been gaining back momentum, with a 5.4% return year to date.
Cautiously managed mixed-asset funds also saw £1.8 billion outflows from January to July 2016 while global equity income funds recorded £1 billion outflows at the same period of time.