On the sixth anniversary of the Brexit Referendum vote Investment Week examined how much global funds were investing in the UK post-Brexit.
As of January 2016, the average UK weighting in an IA Global fund was 12.4%. By the end of the year, after the vote, it had dropped to 10.8% and has decreased consistently year-on-year, accelerating in 2020 as Covid took hold. To date the average global fund has a UK weighting of 8.4%, a decrease of 33.1% overall.
The Brexit saga has peaked and troughed, with the UK finally leaving the EU with an agreed deal of 31 January 2020, but issues have picked back up over proposed changes to the Northern Ireland Protocol.
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Nick Wood, head of fund research at Quilter Cheviot, said that this evidenced that the UK has been an unpopular investment option since the build up to 23 June 2016 and after.
“However, it is interesting to note that the average UK weighting across global funds is considerably higher than the weighting the country has in MSCI ACWI,” he said, roughly 3.5%.
The disparity is caused by UK fund groups generally having a “natural home bias” as part of their range to “ensure clients feel comfortable with what they are investing in”, Wood explained.
The UK’s consistent unpopularity has been backed up by fund flow data. Calastone’s Fund Flow Index (FFI) found that three of the worst months on record for UK focused funds have happen this year, including May’s “pummelling” outflows of £826m.
Part of the UK’s unpopularity has been its general value and cyclical bias, with its large-cap space dominated by banks, financials and energy companies which were not in vogue in the previous equity bull run.
“Now the UK market is at somewhat of a crossroads just now,” Wood said. It still lacks many of the “exciting growth names” that its S&P 500 cousin is known for, but global markets have moved away from these with the onset of higher inflation and interest rates.
“It is possible that we start to see a slight reversal of the current trend as managers look to pick up some short-term alpha or hedge against the pain their more growth-oriented holdings have caused,” Wood said.
“That said, until Brexit is sufficiently resolved and trading partnerships become less volatile, we can expect to see the UK market’s presence in global funds diminish over the long-term.
“Unless we suddenly see a raft of exciting, and potentially sustainably focused, companies list in the UK, more attractive long-term opportunities will continue to be overseas.”
For global managers, taking a bird’s eye view of the market Brexit is still factor in their UK allocations.
David Coombs, head of multi-asset investments at Rathbones, said that “Brexit still forms an important factor in our analysis of the UK’s competitiveness in attracting overseas capital both in the public markets and in terms of direct investment.”
Tom Wildgoose, manager of the Nomura Global High Conviction fund, said that Brexit “is really like any other risk factor that you need to discount into your estimate of fair value”.
Regarding its impact on the UK economy, he said it was clearly having a negative effect, putting downward pressure on the currency. However, he pointed out many UK companies get the majority of its profits internationally, so they are less exposed to this issue somewhat.
For UK managers who cannot divest from the Brexit factor, it is about finding the least impacted opportunities.
Ken Wotton, co-manager of the LF Gresham House UK Multi-Cap Income fund, said: “The segments of the market most acutely impacted by the Brexit vote have had ample time to adjust.”
Wotton focuses on the small-cap end of the market, which tend to bear the brunt of domestic headwinds than the FTSE 100.
According to him, “wider concerns” have deflated UK share prices, making it a “fertile hunting ground” for attractive business, especially in digital healthcare or energy use optimisation.
Indeed, the relative discount of UK share prices versus the S&P 500’s was seen as one of the main selling points of the domestic market coming into this year, although it has evidently not appealed to investors as much as expected.
Looking at the economic and market outlook six years on from the vote and its consequences, they are “effectively subordinate to wider global cost of living pressures, notably from supply chain disruptions, energy shortages and wage inflation”, according to David Kneale, head of UK equities at Mirabaud Asset Management.
“Hence Brexit has only a marginal influence over these preeminent issues.”
It has not just been Brexit issues that have kept investors away from the UK, Kneale said.
“Levies imposed on banks, housebuilders and energy companies, as well as material increases in corporation tax announced years in advance have compounded Brexit’s sense of isolation and seemingly created a lasting deterrent to business investment in the UK.”
This is not to say that Brexit is not relevant at all today, having contributed to labour shortages and overall political uncertainty, which compounded “investors’ lack of confidence in the UK equity market”, Kneale added.