U.S. Markets close in 5 hrs 45 mins

Liquidity Angst Over Brexit Is Fueling a $1 Billion ETF Bet

Ksenia Galouchko
1 / 3

Liquidity Angst Over Brexit Is Fueling a $1 Billion ETF Bet

(Bloomberg) -- Brexit is a muddle, U.K. 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 Inc.’s iShares Core FTSE 100 fund took in 825 million pounds ($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% sell-off in U.K. 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 U.K. barrels toward its planned divorce from the European Union on Oct. 31 and money managers treat the country as uninvestable, BlackRock’s 7.6 billion pound fund has never been so flush with assets.

By contrast, investors have pulled $4.9 billion from U.K.-focused equity mutual funds since June, according to data provided by EPFR. About a third of investors are underweight U.K. 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 U.K. equities are significantly more difficult to trade in large volumes,” said Park. “As a result investors, are selling some of their active U.K. fund exposure fearing market pressure around Oct. 31, which would be exacerbated by lower liquidity.”

Pound Weakness

Meanwhile, the pound -- which has slid 18% since the referendum -- has been a tailwind for the U.K.’s biggest firms. The index tracked by BlackRock’s ETF “generates four-fifths of its sales revenue from outside the U.K., 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 FTSE 100 Index was down 0.3% as of 12:59 p.m. London time on Tuesday.

The shift toward passive instruments by U.K. stock investors highlights a broader turn away from active styles. On Sept. 13, BlackRock’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. A U.S.-listed ETF tracking similar stocks just got its first weekly inflow since May.

While there’s a global trend of ETFs siphoning cash from active funds, there are still old-fashioned stock bulls who say U.K. equities could be in for a rally should things settle down.

“If in 4-5 months time we get a deal, we leave the EU, the Tory government does fiscal spending, U.S. investors are going to look and say that the sterling and U.K. stocks look pretty cheap and they can make an easy 25% return,” said Andrew Cole, head of multi-asset at Pictet Asset Management in London.

(Updates with Brexit development and FTSE 100 move in paragraphs 11 and 12.)

--With assistance from Akiko Itano.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Yakob Peterseil, Rachel Evans

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.