Business

Interesting times ahead for investment industry

The investment industry faces a great many uncertainties going forward: not least the as yet unknown impact of Brexit

AS January draws to a rapid close, we are still looking ahead to what the new decade might bring.

So far 2020 has brought with it a real sense of change: the UK is irrevocably on the way to leaving the European Union after more than three years of agonising since the referendum in 2016 and we once again have a settled political background with a sizeable majority in government which means a smoother passage for legislation.

The investment industry faces a great many uncertainties going forward: not least the as yet unknown impact of Brexit.

We have experienced a somewhat traumatic year in 2019, with the fall from grace of high-profile fund manager Neil Woodford and the notable under performance of the UK compared with other markets.

Gone are the days when a portfolio comprising of blue-chip UK stocks is the norm.

Investment management has been undergoing a revolution over the past decade.

The FTSE 100 is no longer the primary benchmark by which we measure performance of clients' portfolios: we now use indices that include numerous asset classes and geographic regions.

Indeed, exclusion of the US over the past few years would have resulted in substantial underperformance in the main.

Investment has also undergone a revolution in terms of regulation.

We are naturally in line with EU rules, but the post Brexit trading rules are yet to be agreed.

Despite the substantial level of regulation, especially compared with even five years ago, shocks still occur. As noted above the Woodford group, previously such a well-known fund management operation, is no longer in existence with most of the funds having been taken on by other investment houses.

The wider impact has accelerated the trend of moving money to passive funds: there has been a substantial outflow over the past year, with the largest UK investment management companies seeing billions flow out.

The negative publicity has hit the industry hard: in addition to the Woodford situation, large fines have been levied by the regulator and one of the most popular property funds has been closed to withdrawals.

Active funds saw outflows of £32bn in 2019 whereas index trackers attracted inflows of £19bn. For fund managers pressures only increase: lower profit margins, relentless downward pressure on fees plus the unknown future with Brexit.

Another area which experienced outflows over the last year was hedge funds.

They have experienced many years of under performance (since the 2007/8 financial crisis) and even with their best performance for a decade - up 10.4 per cent - this does not compare well with most of the markets: the US S&P 500 index returned 31.5 per cent over the year, for example.

The high levels of volatility are likely to remain a feature of 2020 and this should bring opportunities for active fund managers.

This, as well as the forecast of more mergers and acquisitions in the UK market, largely due to its relative under performance during 2019, should mean that we are facing an interesting year ahead.

Cathy Dixon is a partner at the Belfast office of Cunningham Coates Stockbrokers. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.

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