Investors Sell UK and Europe Funds Ahead of EU Referendum

Investors have sold billions of Europe and UK equity funds so far this year in response to market volatility in both regions ahead of Britain’s EU membership vote.

In April 2016, more than £2 billion outflows were recorded in the Europe ex-UK large-cap equity sector, its largest monthly outflows in five years, according to data from Morningstar Direct.

From January to April 2016, that sector recorded £2.1 billion outflows. The UK mid-cap equity fund sector also saw £206 million outflows from January to April 2016 while UK small-cap equity records £185 million outflows at the same period of time.

While demands for Europe and UK equity funds have declined, holdings of British assets by financial institutions also fell sharply in March and April, according to an investigation into figures published by the Bank of England.

It is reported that around £65 billion of assets in British currency was pulled sold off banks’ books in March and April, the largest monthly fall since January 2009, monthly register of banking statistics by Bank of England reveals.

Chancellor George Osborne responded to the figure, suggesting a correlation of massive money outflows to a potential Brexit. He said: “Financial markets are telling us what all the evidence shows: that Britain will be permanent poorer if we vote to leave the EU and the single market.”

Edward Smith, asset allocation strategist at Rathbones agrees, saying that his analysis suggests that there is “a very high correlation” between economic uncertainty and risk premiums on UK assets, particularly mid-cap and small-cap equities.

Mid-cap and Small-cap Buying Opportunities

The latest opinion polls regarding EU referendum show that the Remain and Brexit campaign are too close to call but the bookies have preferential odds for Britain voting ‘yes’ to stay in the EU. Investors might be sceptical about investing in the UK market, but Smith suggests that this might be an opportunity to buy mid-cap and small-cap assets at a discount.

“There is clearly a big valuation discount already being priced into the FTSE 250 and also the FTSE Small Cap Index and that could well present quite a substantial opportunity if we vote to remain,” says Smith.

For investors who worry about taking singular stock bets in the market, investing in funds allows them to be diversified over a broader range of assets; avoiding putting all your eggs in one basket. According to Morningstar data, we find one mid-cap and one small cap fund which are highly rated by Morningstar analysts and deliver long-term outperformance. However they also recorded outflows in the past months.

The Silver Rated mid-cap equity fund Franklin UK Mid Cap has comfortably outperformed the benchmark and the UK Mid-Cap Equity Morningstar Category average over the fund manager, Paul Spencer’s tenure, says  Morningstar analyst Samuel Meakin. He retains confidence in Spencer’s ability to get his long-term calls on companies’ right. Spencer’s long-term approach, pragmatism, and strong stock-picking skills combine to make this fund one of the more attractive mid-cap UK equity funds. The fund generated 13.5% return in 2015 and it has 11.3% five years annualised return.

Despite of its long-term out-performance and a Silver Rating, the fund has recorded £43 million outflows from January to April this year.

A Bronze Rated small-cap equity fund Liontrust UK Smaller Companies also has a long and impressive track record in generating positive returns. Meakin believes that this fund is an attractive offering for investors seeking exposure to UK small-cap companies. The fund is managed by highly experienced managers Anthony Cross and Julian Fosh, with Cross in particular bringing a wealth of experience investing in UK small-cap companies.

The fund gains 23.5% in 2015 and it has 17.1% five years annualised return. However, the fund has seen outflows since December last year, data from Morningstar Direct shows. In April 2016, the fund recorded £9 million outflows.

Source: Morningstar – Karen Kwok | 09/06/2016

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