UK-specific equities continue to suffer, but could Brexit anxiety backfire?

Investors are still responding to uncertain political times with more cautious investment choices, new figures on the most and least popular fund sectors from the Investment Association reveal.

The targeted absolute returns sector’s dominance came to an end in February after four months as the top-selling sector, dropping from £296.5 million net retail sales in January to £128.8 million in February. While this may indicate a slight uptick in market confidence, the sector was overtaken by relatively cautious, stable investment sectors only, including high yield (£147.5 million net retail sales), mixed-Investment 20-60% shares (£163.5 million), strategic bonds (£228.4 million) and mixed investment 40-85% shares (£302.9 million).

Alastair Wainwright, fund market specialist at the Investment Association, noted that the relative success of these sectors illustrates ‘the value that UK investors place on professional asset allocation skills during challenging economic times.’ He explains that ‘strategic bond funds have a mandate to invest across the spectrum of fixed income securities, and the strong sales of these products illustrate that UK consumers are looking to professional investors to navigate fixed income markets on their behalf.’

UK all companies was the worst-performing sector for the second consecutive month, with net outflows of £219.9 million, although that is an improvement from -£407.7 million in January. Negative net retail sales were seen across all UK-specific equity sectors except for UK smaller companies, which gained a modest £43.9 million in net retail sales. 

Jason Hollands, managing director at Tilney Bestinvest, notes that UK-specific sectors’ poor performance could ‘be a sign of ongoing Brexit anxieties ahead of Article 50 being triggered,’ but argues that ‘while retail investors may believe the shunning of UK equities in favour of overseas funds is a defensive move, it could well be one that seriously backfires because of the currency risk they are taking.’

He explains: ‘Currency moves have been a key driver of stock market returns for UK-based investors, seriously flattering their gains on non-UK holdings. But that could reverse from here, especially once rates start to rise again or if the UK economy continues to prove resilient.

‘Views on the direction of sterling are quite polarised within the investment community at the moment and currency shifts are notoriously difficult to predict. What we do know is that currency markets can move with extreme speed and brutality, and therefore this will be an acute risk for UK investors buying overseas assets in the short to medium term.’

View the net retail sales for all IA sectors below:




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