Total assets managed in the UK by the IA’s members reached a new high in 2016, ending the year at a record £6.9 trillion. The strong growth largely reflected increases in the sterling equivalent value of overseas assets as the UK’s currency weakened in the wake of the Brexit referendum.
The role of the UK as a leading global centre of asset management remained clear as £2.6 trillion was managed in the UK on behalf of overseas investors, half of which was from clients in the EEA. The export of services by UK asset managers to overseas investors has contributed an average of 6% of total net service exports from the UK over the past ten years.
Thirty-six percent of assets managed in Europe were managed from the UK. The UK remained the largest asset management centre in Europe, and is globally second only to the US. At the end of 2016 around £900 billion was managed on behalf of fund ranges in Dublin and Luxembourg, which delegate their fund management activity to the UK. Retaining this delegation arrangement will be key to maintaining the UK’s position in a post-Brexit world.
Asset managers in the UK continue to facilitate the movement of capital from investors to companies via equity and fixed income allocations. Furthermore, at the end of 2016 IA members reported holding an estimated £29 billion in infrastructure investment. Approximately three quarters of this (73%) was directed to economic infrastructure, with the remainder going to projects offering a social benefit.
The allocation to other assets increased to 21%, up from 19% in 2015. Three quarters of this category now reflects investment solutions rather than ‘traditional’ alternative assets. The shift into outcome-oriented products seems to reflect a structural change in both institutional and retail investor behaviour and is one which IA members expect to continue in the coming years.
The allocation to equities has fallen to 39% in recent years. The allocation to European equities, both UK and mainland, fell six percentage points to 54% of the overall equity allocation at the end of the year. The regions of North America and the Asia Pacific were the main beneficiaries.
Institutional clients continued to account for the majority (79%) of total assets under management in the UK. This proportion has remained relatively stable in the last decade, but the distinction between retail and institutional is becoming increasingly blurred. As defined contribution (DC) pensions grow, and the investment risk shifts from the employer to the individual, pensions are resembling more retail, rather than institutional, assets.
IA members managed an estimated £3.6 trillion for institutional clients at the end of 2016, up from £3.3 trillion in 2015. Pension funds accounted for approximately £2.2 trillion. The use of multi-asset mandates continued to rise among institutional clients (21%), potentially driven by the success of automatic enrolment, and specifically the widespread use of mixed asset funds as the default investment strategy in DC pensions.
The value of retail funds held by UK investors reached a record £1,045 billion at the end of 2016 – up by 13% from 2015. Net retail sales by UK investors were at £4.7 billion which was low by the standards of recent years. This was largely driven by investor behaviour around the time of the Brexit referendum.
The trend towards outcome-oriented funds continued with positive retail sales of £8.7 billion in 2016. Absolute Return funds were the most popular sector within this asset class with £5.1 billion of net new retail money flowing into the sector.
Property and Equity funds had a particularly bad year in 2016, as investors withdrew £2.0 billion and £8.1 billion respectively from them. The bulk of the outflows were in June and July in response to the Brexit referendum.
The UK asset management industry remained relatively unconcentrated at the end of 2016, although there were signs of a reduction in the number of the smallest firms coupled with an increase in the number of large firms. This was likely fuelled by continuing M&A activity. Assets managed by the top five firms increased to 40% from 37% in 2015.