‘Brexit’ Fears Mount for Asset Managers

The UK will vote on its membership of the EU this summer, and asset managers are already weighing the risks they face.

The asset management sector faces significant disruption should the UK leave the European Union (EU), according to fund groups and lawyers.

The so-called ‘Brexit’ could see the UK’s annual economic output fall by between 0.5% and 1% for at least a decade, according to French bank Société Générale, while the Eurozone could incur output losses of 0.1% to 0.25%. A referendum on the UK’s membership will be held on June 23, Prime Minister David Cameron announced on Saturday.

Fund managers could be hit on the distribution side too, commentators warned. Groups offering UCITS funds would be affected as, by law, these products must be domiciled and managed in the EU.

One lawyer told CIO’s sister publication The Trade that a ‘Brexit’ would force UK-based managers to adopt a similar structure to those used by some US managers distributing to European investors. US managers often have delegated managers for funds domiciled in the EU, to ensure compliance with UCITS rules.

In addition, ‘Brexit’ could result in higher transaction costs and a need for more investment staff, according to a November 2015 report from Morgan Stanley. UK fund groups would likely need to formalize new country-by-country distribution arrangements, which could be expensive, the investment bank added.

A survey by Aviva Investors of 26 fixed income asset managers, running a combined total of $2 trillion globally, reported that not one believed the UK would exit the union. However, the group said a fifth of the equity managers it surveyed believed such an outcome was possible.

Sterling fell dramatically following the announcement of the referendum and support for an exit from several high-profile politicians. The pound had declined 1.76% against the dollar by 12:20 EST on February 22, according to Bloomberg. In contrast, the FTSE 100 gained 1.47% during Monday’s trading.

An in-depth version of this article is available via The Trade’s website.

Related: Private Debt Key as UK Investors Turn Cautious & The Big Smoke or the Big Apple?