The U.K.'s plan to leave the European Union is already affecting the way some institutional investors and money managers are thinking through their allocations and investment tenets in the region.
Some clients are asking money managers to ring-fence U.K. assets from pan-European allocations, segregating the exposure either to give them greater control and active management of that allocation or to enhance risk management, sources said. Other investors are now considering the U.K. and Europe as separate entities when acting on their investments.
"It has always been very much two Europes for us — now it's three," said Olivier Rousseau, executive director at the €36 billion ($42.3 billion) Fonds de Reserve pour les Retraites, Paris. "We have always had an allocation to the eurozone and to Europe. And now I should say we should think in terms of three Europes – eurozone, the U.K. as such because of Brexit in particular, and the rest of Europe — Switzerland and (the) Nordic markets." FRR has a "very small allocation" to the U.K. via its Europe exposure, he said.
A statement from the €26 billion Etablissement de Retraite Additionnelle de la Fonction Publique, Paris, said: "Clearly Brexit will lead investors to reconsider the level of their exposure to (the) U.K. The most immediate impact for those that are already invested is linked to the pound depreciation. It has been quite impressive and many investors' boards are sensitive and asking questions to the investment departments."
While ERAFP executives said the U.K. "will not lose all the features that contributed to make it prosper ... one might doubt that a hard Brexit would not adversely impact the financial sector that has been contributing so much" to the country's growth. "ERAFP will be looking cautiously to any additional exposure to U.K.," said the statement.
Europe ex-U.K. pension funds "have historically considered a whole Europe equity region, and are now beginning to split things in order to manage exposure — particularly where the U.K. is a very sizable part of the region and risk factor relative to the home country of the pension fund," especially if the fund is based in Switzerland, Sweden, Denmark or Norway, said Nikesh Patel, London-based head of investment strategy, U.K., at Kempen Capital Management.
However, a complicating factor is defining U.K. exposure "when it comes to trying to manage Brexit-related risks on these pension funds, as you need to look beyond the geographic location of the stock listing and to the underlying earnings, which for the majority of the largest U.K. equities, are generated outside the U.K. This second step is typically carried out by active managers. We do this for our clients, but we see little evidence of a major trend amongst large European pension funds to do this strategically," Mr. Patel said.