UK Investors Vote For Europe By Transferring Assets

How a second Brexit referendum would play out in 2019 compared to the 2016 edition is far from certain. However, there might be a clue in the recent behaviour of UK investors. Over the year and a half leading up to the original 2016 Brexit referendum British investors made net positive inflows of £2.5 billion into UK-based funds. Over the period since, £62 billion has been taken back out and reinvested in EU-based alternatives.

The vote on no-confidence in UK-based funds over the nearly three years since the June 2016 referendum saw two peaks in the reallocation of capital from Britain to Europe. The first came after Theresa May’s ill-judged general election saw her Conservative Party lose their parliamentary majority. The second was earlier this year when the prime minister failed in her attempts to get the Brexit deal she had negotiated with the EU through parliament, suffering a record defeat as MPs across parties voted against it.

With a no-deal Brexit looking like a distinct possibility in March and April, individual UK investors as well as institutional investors like insurance and pension funds scrambled to move a whopping £4.2 billion from British to EU-based funds. The data is provided by Calastone, the market leading fund transactions network.

Edward Glyn, Calastone’s head of global markets, further revealed that Dublin and Luxembourg were the two biggest gainers from the recent flight of British investment capital out of the UK and into Europe.

The company’s ‘Calastone Fund Flow Index’ shows a hugely worrying pattern for the UK’s financial markets. Before the Brexit referendum British investors invested just £1 into European-based funds for every £14 into British-based funds. Since, that ratio has dropped spectacularly to £1 into Europe-based funds for every £1.50 invested in British-based option. Over the past six months the majority of capital has gone to Europe - £11.2 billion to £9.9 billion invested in the UK.

The flows data does not include fund groups moving assets owned by EU-based clients who want to avoid post-Brexit regulatory headaches and only capital held by British investors. That indicates it’s a bet on future stock market performance on both sides of the Channel, rather than a practical move anticipating future difficulties moving money around across borders.

High net worth and institutional investors rather than smaller investors are the source of most of the capital flow towards Europe with the latter largely remaining invested in UK-based funds.

However, the contrarian approach to betting on Britain could pay off in the long run. Institutional investors have to take both short and long term investment horizons as big losses over the short term can see clients get cold feed and pull their funds. Wealthy investors who take cash flow out of their investments might also be more worried for the same reason.

However, long term investors with no intention of cashing in their investment portfolios over the next several years could benefit from keeping on investing in the UK market. Prices have been depressed by capital outflows, which could mean bargains that show significant gains in future years once Brexit uncertainty is removed and the political and economic environment stabilises.