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Investors punish UK equity funds as threat of no-deal Brexit looms

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A net £1.2bn has flooded out of UK-focused equity funds in the three months to August as a “disorderly Brexit” appears on the horizon.

The latest Fund Flow Index from fund technology company, Calastone, revealed that this has been the worst three-month period of outflows from UK-focused equity funds on record.

In fact, it is even worse than the immediate aftermath of the Brexit vote in 2016, it noted.

In contrast, equity funds without a specific UK focus enjoyed their second best quarterly period in almost two years. Investors added £1.6bn to their non-UK holdings.

Calastone added that UK funds have now seen outflows for five months in a row.

But equity income funds which are also heavily weighted to UK equities have also had their worst three-month period. Calastone estimates a further £1.4bn of outflows in this area.

The August data suggests European equity fund may have stemmed their outflows as £170m on net inflows were made – the first time investors have added new capital to European funds since September 2019.

‘Prospect of no-Brexit deal clouding outlook for UK’

Edward Glyn, head of global markets at Calastone, said: “Not content with the economic storm caused by the pandemic, the prospect of a no-deal Brexit is once again clouding the outlook for the UK too. This is prompting investors to dump their UK holdings and switch to markets showing greater Covid-19 resilience and that don’t face Britain’s bespoke Brexit risks.

On the face of it, the inflow to European funds seems strange given rising infection rates but European equities are relatively cheap compared to their record-priced US counterparts and the dollar is in decline. Funds focused on US equities had one of their worst months in the last year in August so investors may be switching focus as a hedge against the political, social and economic upheaval in the US, though we will need to see several more months of solid inflows to Europe before we can be sure this is a new trend. Low valuation alone is not enough to tempt investors as unloved UK equity funds can testify.”

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