Brexit fears spook UK fund houses

The UK Conservative party's shock victory in last week's general election has heightened fears in the fund industry of a potentially damaging exit from the EU.

Opinion polls had pointed to the likelihood of a government led by the Labour party, which had ruled out the possibility of a referendum on the UK's membership of the 28-nation bloc, or a minority Conservative administration backed by the resolutely pro-European Liberal Democrats.

However, with the Tories securing a small outright majority, the path is now cleared for an in-out referendum in 2017, as the party has promised, leading to consternation across much of the industry.

"I am a bit gobsmacked. Clearly we will have a referendum," said Daniel Godfrey, chairman of the Investment Association, the UK trade body. "It is our position that we would like to see the UK remain in the EU. Europe is extremely positive for the UK investment sector and the case for staying in Europe is compelling."

A senior portfolio manager at one of the UK's biggest fund houses, who requested anonymity, said: "There is no question that it is not positive for the UK asset management industry if Britain leaves the EU. The EU is our biggest trading partner and there is a real danger that we could be frozen out of our core markets. People are praying it does not happen."

Saker Nusseibeh, chief executive of Hermes Investment Management, said London would no longer be the financial centre of Europe if it were outside the EU, arguing that Switzerland had suffered from its absence from the bloc.

"The days of offshore financial centres are finished. The lesson of Switzerland is you cannot be the centre if you are outside," Mr Nusseibeh said. "The best you can hope for is [a situation like] Norway, with almost all the regulation but none of the positives. I do not see why that is beneficial."

The UK's financial services sector runs a £19bn a year surplus with the rest of the EU, despite Britain's broader deficit with the bloc.

In February, Leon Cornelissen, chief economist at Robeco, the €200bn Dutch investment house, told FTfm that Brexit "would be a kind of economic suicide".

Ewen Cameron Watt, investment strategist at BlackRock, the world's biggest fund house, feared Brexit would be so "disruptive" that some UK-based fund houses would be looking at the option of moving their domicile to continental Europe in the event of an "out" vote. This would replicate the behind-the-scenes planning that accompanied last year's Scottish independence referendum.

Dominic Rossi, global chief investment officer for equities at Fidelity Worldwide Investment, argued there was a case for bringing the referendum forward to 2016 to reduce the period of uncertainty for the business community.

"[The referendum] is going to happen. The question is whether we should get it out of the way," he said.

"The long-term implications of Brexit for UK-based companies would be undoubtedly damaging. There are many multinationals in the UK because they think it is a good place to do business in Europe."

Investors are being advised to increase their exposure to overseas investments in order to protect themselves from any fall in the value of UK assets due to the continuing uncertainty.

Despite this, sterling, gilts and UK equities all rallied on Friday, with stocks in sectors likely to have faced greater regulation or taxation under Labour leading the gains. There was speculation that the rally was driven more by short-covering than outright buying.

Hendrik du Toit, chief executive of Investec Asset Management, the South African fund house, warned that the rise in markets is unlikely to last when the difficulty of Britain renegotiating membership terms with the EU becomes apparent, as well as the possibility of another referendum on Scottish independence.

"For now this outcome is good for asset prices. Looking ahead, we cannot ignore the storm clouds. Enjoy the fun while it lasts," he said.

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