July 25, 2017 / 12:30 PM / a year ago

Northern Trust clients "segregate" UK from European exposure

LONDON, July 25 (Reuters) - Around a third of Northern Trust’s institutional clients have asked it to ringfence British exposure from their broader European portfolios to protect them from Brexit-related risks.

Wayne Bowers, Northern Trust Asset Management’s EMEA and Asia-Pacific chief investment officer who helps manage around $1 trillion in assets, said these clients did not necessarily want to sell British stocks and bonds, but to prepare portfolios.

Reuters reported earlier this year that investors are avoiding lumping British stocks, which have been an intrinsic part of the European investment process for decades while Britain has been an EU member and London a key financial centre, into Europe-bound investments.

This follows uncertainty for the world’s fifth-biggest economy triggered by the country’s mid-2016 vote to exit the European Union which has hit both growth and the pound.

“Instead of having their European equity and fixed income exposure to include the UK, they are saying can you please ringfence UK exposure,” Bowers told reporters on Tuesday.

Such ringfencing of assets is not unprecedented, it was in demand during the 2008-9 global financial crisis when clients asked asset managers to segregate financial industry shares out of broader equity portfolios, Bowers said, estimating that 30 to 40 percent of Northern Trust clients were asking for this.

“They want it segregated, recognising they may want to take an extra asset allocation position - either increase or decrease - but they want to be able to do that without impacting their broader European exposure,” Bowers said.

Requests to separate UK portfolios are usually from non-European clients, including U.S. based and sovereign wealth investors, he said, adding that it had minimal costs.

Bowers expects the UK economy and sterling to stay under pressure in the next couple of years due to the “opportunity cost” of Brexit, although UK stocks tend to benefit from currency weakness. The FTSE’s UK equity index rose 15 percent in 2016 and is up 4 percent so far this year.

“The domiciliation of corporate activity in UK will continue, it will be clouded by the ‘press pause’ approach by some global multinationals...but we don’t think it’s a stop, we think it’s a modest pause,” Bowers said.

“We can’t extrapolate that their next move will be out of the UK.” (Reporting by Sujata Rao; editing by Alexander Smith)

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