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Unpicking the Brexit pressure on UK equity funds

Parliament-London-UK-Night-700x450.jpgInvestors are remaining cautious in the UK equity space but fund performance has not been as disappointing as some might think

Looking at the UK All Companies sector, which the Investment Association stipulates 80 per cent of assets must be in UK equities, it is clear investors are nervous. While UK equities are not reflective of the economy, they remain out of favour.

According to the most recent figures from the IA, total net retail sales slumped in May, with the sector dropping to the worst-selling with outflows of £995.7m and Isa sales dropped, also seeing outflows of £69.7m on platforms. AJ Bell estimates outflows have reached £9.1bn since the Brexit vote two years ago.

May marks the 14th consecutive month of outflows in the sector, but despite this it remains the largest by funds under management, with a total £182.4bn – the next largest is the IA Global sector with £110.6bn.

But for those who have remained in the sector, it is not all doom and gloom. In fact, the sector has seen stellar returns over the past few years.

The sector holds 262 funds and over the past 12 months, just eight have not had a positive return. The table below shows the top and bottom 10 performers over the past three years as at 17 July, according to FE data.

The top performing fund over one year to 17 July is Castlefield’s £396.3m UK Buffettology fund run by Keith Ashworth-Lord. The fund is unconstrained by benchmark and the manager uses “business perspective investing” as used by Warren Buffett. The fund has a highly concentrated portfolio of fully listed or Aim-quoted businesses.

Looking at a longer-term investment, the best performer over three years is the £267.2m Chelverton UK Equity Growth fund, managed by James Baker and Edward Booth. The fund, launched in 2014, invests in small- and mid-cap companies and aims to deliver “progressive long-term capital with no income”.

The sector weightings of the fund, as seen in the chart below, shows a bias towards the telecom, media and technology space, amounting to 19.23 per cent of the fund, according to FE.

Fund sales shows there is clearly alarm among investors in the space regarding the macroeconomic environment – specifically Brexit. Sales have plummeted in the UK sectors and property since the referendum and voters may be right to be wary. A deal has yet to be struck, so the future of UK investing and the companies that run the funds is in limbo. It remains a difficult topic to forecast and fund managers have been reluctant to take a stance. As such, many managers are not positioning their portfolios for a macro scenario, but instead focusing on the solid returns UK companies are seeing.

It is also worth noting many UK companies, while listed in London, have a very global coverage. Some of the largest companies – particularly in the FTSE 100 – are conglomerates operating in multiple companies worldwide.

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