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Kerry Lutz's--Financial Survival Network

Apr 17, 2019

Brexit chaos spurs record flows to sterling-hedged funds. Investors pour money into pound-proofed ETFs at a rate seven times that of a year ago. According to figures from Lipper, the data provider, net inflows into Europe-based ETFs that are hedged to sterling reached record levels during the first three months of 2019. These funds pulled in close to €1.7bn during the period, as investors looked to protect themselves against currency risks linked to a no-deal Brexit. The inflows represent a sharp increase on the comparable period a year ago, when investors put a net €256m into sterling-hedged funds.

This year’s largest inflows came in February, with almost €1.1bn moving into ETFs hedged to the British pound. Invesco, UBS and Lyxor were among the asset managers that gathered the lion’s share of new money into sterling-hedged ETFs during the quarter.

Detlef Glow, head of research for Europe, the Middle East and Africa at Lipper, said increased demand for currency-hedged funds had come during a strong sales period for the ETF industry more generally.

“An additional driver might be Brexit, as investors fear currency losses and are therefore hedging themselves against this risk,” he said.

According to Lipper data, almost €27bn flowed into Europe’s ETF sector during the first three months of 2019. February in particular was a standout month, with net inflows of €13.5bn recorded.

Andrew Walsh, head of passive and ETF specialist sales for the UK and Ireland at UBS Asset Management, said: “We have seen a few of our larger clients, and many other mid-sized clients, going into GBP-hedged in recent months on the basis that sterling is undervalued at current levels, no matter what the eventual outcome on Brexit.”

Paul Syms, head of ETF fixed income product development for Europe, the Middle East and Africa at Invesco, said the asset manager has seen particularly strong demand for the GBP-hedged version of its US Treasury Bond 7-10 year ETF since its launch in January.

“There are various reasons for investors buying longer-dated US Treasuries, which would include, but are not limited to, concerns about an economic downturn in the US and easing of monetary policy,” said Syms.

“In addition, the UK is obviously facing the numerous risks around Brexit, which may cause sterling to be more volatile than in normal market conditions. For a sterling-based investor, the potential for sterling to rise or fall quite dramatically around the decision on if, when and how Brexit takes place — which has nothing to do with their economic view — may be a reason to hedge foreign-currency denominated assets.”

The UK is now scheduled to leave the EU on April 12, with or without a withdrawal agreement in place. Prime Minister Theresa May has said she will work with Labour leader Jeremy Corbyn to help end the deadlock in parliament.

Any new proposals on the UK’s future relationship with the EU will need to be agreed by MPs ahead of an emergency EU summit on Brexit scheduled for April 10.

The prime minister said she would ask the EU for a further short extension to the Brexit date, with hopes that an agreement can be signed off before May 22 to prevent the UK taking part in European elections.

But EU leaders poured cold water on the short-extension proposal, with The Guardian reporting that Jean-Claude Juncker, European Commission president, has said May will be given a choice between a longer delay, of up to a year, or crashing out with no deal on April 12.

The ETF figures from Lipper come as anxious property fund investors have pulled more than £1bn from UK real estate funds since the start of this year, prompting fears that the sector is on course for a repeat of disruptive and costly fund closures experienced in the wake of the referendum vote in 2016.

Data from Calastone showed that net outflows from open-ended property funds hit £578m in the first three months of the year — the second-highest level of quarterly net withdrawals since the data provider began collating figures four years ago.