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Liquidity angst over Brexit fuelling a $1 billion ETF bet

By contrast, investors have pulled $4.9 billion from UK-focused equity mutual funds since June.

Bloomberg|
Oct 09, 2019, 08.04 AM IST
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The shift toward passive instruments by UK stock investors highlights a broader turn away from active styles.
Brexit is a muddle, UK shares are the world's most shunned and, to top it off, the FTSE 100 Index just suffered its worst week in a year. Yet the biggest British stock ETF is flying high.

BlackRock’s iShares Core FTSE 100 fund took in £825 million ($1 billion) in September, the highest monthly total in its 19-year history, according to data compiled by Bloomberg. Investors continued to add cash last week even as a global growth scare sparked a 3.7 per cent selloff in UK stocks.

What’s going on? While the inflows reflect bets on a weaker currency boosting British multi-nationals, they’re also part of broader message from investors: Active mutual funds are out, and more liquid, easy-to-sell exchange-traded products are very much in.

“This is about a shift into ETFs and an even greater fall in active exposure,” said Edward Park, deputy chief investment officer at Brooks Macdonald Asset Management. “For those looking for cheap exposure to the multi-national exporters, the FTSE 100 ETF is a way to get rapid exposure with plenty of liquidity.”

Even as the UK barrels toward its planned divorce from the European Union on October 31 and money managers treat the country as uninvestable, BlackRock’s £7.6 billion fund has never been so flush with assets.

By contrast, investors have pulled $4.9 billion from UK-focused equity mutual funds since June, according to data provided by EPFR. About a third of investors are underweight UK stocks, the highest share for any market in the world, according to the latest Bank of America Corp. Survey That’s been a boon to BlackRock’s passive product.

Active equity funds are heavily positioned in small- and mid-cap domestic companies, according to Park. These firms are seen as vulnerable not only to a weaker pound but also to the types of liquidity scares suffered by star manager Neil Woodford’s flagship fund.

“Small and mid-cap UK equities are significantly more difficult to trade in large volumes,” said Park. “As a result investors, are selling some of their active UK fund exposure fearing market pressure around October 31, which would be exacerbated by lower liquidity.”

Meanwhile, the pound — which has slid 18 per cent since the referendum — has been a tailwind for the UK’s biggest firms. The index tracked by BlackRock’s ETF “generates four-fifths of its sales revenue from outside the UK, and as a result tends to be less susceptible to GBP weakness,” a spokesperson for the firm said.

In the latest twist of the three-year political saga, Prime Minister Boris Johnson told German Chancellor Angela Merkel a Brexit deal is essentially impossible if the EU demands Northern Ireland should stay in the bloc's customs union.

The shift toward passive instruments by UK stock investors highlights a broader turn away from active styles. On September 13, Black-Rock’s FTSE 100 fund was the most heavily traded security on the London Stock Exchange, with $270 million worth changing hands, according to the firm.

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