US funds cut exposure to UK equities amid Brexit fears
Portfolios adjusted on short-term views
US-based equity investors have pulled out of the UK at a faster pace than their British-based rivals in a sign that the threat of Brexit is driving a shift in ownership of the UK stock market.
Global US mutual funds cut their exposure to UK stocks in the first quarter of the year to the lowest level in four years, according to Morningstar. They reduced their holdings by 0.51 percentage points compared with the previous quarter, to 8.79 per cent.
UK-based global mutual funds cut their exposure to UK stocks by 0.33 percentage points to 11.84 per cent in the same quarter. Their exposure is still higher now than a year ago.
The faster pace of US withdrawals — which some fund managers say is due to uncertainty surrounding Thursday’s vote on the UK’s membership of the EU — comes at a fraught time in the relations between British and American investors. Tensions have risen over pay, governance and trading philosophies. Some UK fund managers have accused their US rivals of creating market volatility by trading too frequently, and not sufficiently engaging in big decisions such as on executive remuneration.
“There is a more short-term culture in the US,” says Matthew Beesley, head of global equities at UK-based investment manager Henderson Global Investors. “This short-term approach hasn’t been helped by Brexit.”
The behaviour of US mutual funds matters, as the US owns about a quarter of the UK stock market, more than any other country with the exception of Britain itself, which holds 46 per cent. American ownership has risen sharply since the early 1990s, when it was about 5 per cent, according to the Office for National Statistics.
US companies, such as the world’s biggest investment group BlackRock and Vanguard, which is primarily a passive investment group, dominate the shareholder lists of the FTSE 100’s biggest companies, including Royal Dutch Shell, HSBC, GlaxoSmithKline and British American Tobacco.
These US managers are doubly exposed to the risk of turbulence if the UK votes to leave the EU. A mutual fund whose investment portfolio is valued in dollars would lose money on its British holdings if sterling falls sharply, as well as suffering if share prices fall.
Analysts say this might explain the bigger US withdrawals from the UK in recent months.
Vincent Montemaggiore, a portfolio manager at the $5bn Fidelity Overseas fund in the US, says he has scaled back his overweight position in UK stocks in the run-up to the EU referendum.
“I do not like to focus on the macro,” he says, “and 99 per cent of my time is spent on bottom-up analysis, but sometimes you have to step away from the stocks for a second.”
Recent opinion polls show a shift towards Britons voting to remain in the EU.
But assets in the UK fund industry have fallen by almost a fifth during the past 12 months, according to Lipper data — a reduction blamed on investor jitters ahead of the referendum. The FTSE All-Share index has fallen 7 per cent in the past year, compared with a 1.3 per cent drop for the S&P 500.
A Bank of America Merrill Lynch survey of 213 fund managers, released last week, showed international investors had increased their cash holdings to the highest level since 2001.
“It is more difficult to evaluate uncertainty the further away you are from it,” says John Roe, head of multi-asset funds at Legal & General Investment Management. “This is why some US-based and foreign investors can be more nervous about things such as Brexit.”
The US withdrawals come after a recent flare-up of tensions between UK and US investors.
Some UK companies have complained that it is harder to engage with US fund managers, while British investors say their US rivals are more likely to outsource decisions — such as on executive remuneration — to shareholder advisory groups. They have warned this undermines shareholder rights and sours relations with company executives.
“It is appalling the way some US groups simply outsource their vote on pay and other issues,” says the head of sustainability at a UK institution. “The vote is the key lever of influence, yet it is treated like a commodity.”
The chairman of a FTSE group that suffered a big pay rebellion this year adds: “It was disappointing because we tried to engage with the shareholders and the advisory bodies, but there was no dialogue.”
The issue of pay has proved a particular flashpoint between UK and US fund managers this year. During a fiery shareholder annual meeting season British companies including BP, Anglo American and Shire suffered big rebellions over executive remuneration.
Groups such as Los Angeles-based Capital Group and Boston-based Wellington Management Company have been singled out by UK executives as difficult to engage with on the subject.
The UK critics have said these groups “slavishly” follow the recommendations of shareholder advisory groups, such as Institutional Shareholder Services and Glass Lewis, which represent about 30 per cent of investors in the FTSE 100 and FTSE 250.
Michael Cohen, chairman of Capital International, which is part of Capital Group, says: “The number of UK companies that we engage with on remuneration and governance matters has increased significantly over the past several years.”
ISS and Glass Lewis stress they are used as a filter and not as a rubber stamp. Wellington declined to comment.
Other investors say it is unfair to accuse US groups of short-termism as some of the biggest US fund managers, such as BlackRock, are noted for their long-term outlook.
Meanwhile business leaders and investors agree that cross ownership from the US is a force for good and a natural part of globalisation.
“Americanisation of executive pay, with too rigid a following of advisory groups, is not a good thing,” says Simon Walker, director-general of the Institute of Directors.
“But I would not dream of arguing that we should block US firms from owning the UK stock market, even if there is more volatility in the run-up to events such as the Brexit vote.”