Asset Allocations Pre-Brexit, Post Brexit and now
30 September 2016
Mike Turner – Research Manager (Funds and DFM)
We hear in the press that fund managers have shifted exposure to various asset classes as a result of the Brexit vote such as decreasing UK and European exposure, decreasing exposure to property and that fund managers have increased their cash positions. However we tend not to see the numbers behind such statements.
The purpose of this article is to demonstrate how asset allocations have shifted over the past six months and to what extent.
Have asset allocations really changed that much?
We’ll look at figures just prior to Brexit, immediately after Brexit and in the subsequent months following Brexit to now, so that you can see in a snapshot, how things have changed and to what extent.
One of the challenges when looking for trends in Fund Managers shifting asset allocation is selecting a universe of funds that aren’t biased toward specific asset classes or geographic regions. Many sectors have constraints around asset allocation which although maybe useful for comparing like for like funds, present a challenge when attempting to analyse shifting asset allocations.
For the purpose of this article we’ll be using the IA Flexible sector as our fund universe, the sector isn’t constrained by asset class allocation limits and the nature of the sector is that it’s generally comprised of Multi-asset funds, meaning that the fund managers have the flexibility to shift asset allocation where necessary without breaching any sector constraints (however there will be mandate constraints depending on the benchmark used).
If Brexit has had an impact on which asset classes and geographic regions fund managers would prefer to invest in, this should be evident from analysis of the flexible sector.
To start I calculated the mean across all funds in the IA Flexible sector for each of the sixteen asset classes that advisers have access to within our Engage research system. I performed this for the last 6 discrete months and plotted in the below graph which shows the sixteen asset classes along the x-axis with the percentage allocation along the y-axis.
From looking at the above graph, we can see that cash allocations have been on average decreasing each month until end of September where they increased to the same level that they were immediately after Brexit.
We can see that UK Government Bond allocations halved at the end of July however this coincides with the base rate cut as opposed to a reaction to Brexit.
UK Equity and European (ex UK) Equity sector allocations have decreased over the past six months as the uncertainty continues around how Europe and the UK will trade after the UK formally leaves the EU.
Property has stayed much the same over the six months. Many property funds suspended trading post Brexit due to mass redemptions from investors, therefore fund managers couldn’t exit these funds if they had them in their portfolios.
The equity sectors that have increased in allocation over the last six months are North America and to a lesser extent, Emerging Markets and Absolute Return.
In conclusion over the last six months, fund managers haven’t made dramatic changes to their portfolios, instead there’s been subtle shifts in allocation just prior to Brexit and in the following months. Larger shifts in asset allocation occurred well in advance of the EU referendum.