Wealth managers have continued to move client assets out of funds investing in the UK in 2019, to avoid being "stuck" with holdings negatively impacted by Brexit, according to FE.
FE's latest Adviser Fund Index (AFI), which rebalances twice a year, shows wealth managers now favour funds within the Investment Association's Global Bonds sector in efforts to reduce their exposure to sterling's continued decline as the UK heads towards the 31 October Brexit deadline.
In this latest AFI rebalance, which measures exposure via different risk weightings, FE found IA UK Smaller Companies and IA UK Direct Property funds saw falls of more than 1.6% and 1.1% respectively for AFI Aggressive since February.
Meanwhile for AFI Balanced, IA UK Direct Property fell by almost 2% and IA UK Smaller Companies fell by 1.7%.
By contrast, IA Global Bonds funds saw flows increase 3.1%, 2.6% and 2.1% for AFI Aggressive, Balanced and Cautious respectively.
Bonds, particularly government bonds, have rallied in recent weeks as investors seek safety amid concerns about trade and the overall health of the global economy. On Thursday (15 August) the US 2y10y yield curve inverted for the first time since the Global Financial Crisis after flattening over recent weeks.
Portfolio manager at FE Oliver Clarke-Williams said the "effects of wider political uncertainty and growing fears of a no-deal Brexit" have "underpinned" wealth managers' approach in the latest rebalance.
He added: "With the 31 October deadline for Brexit fast approaching, wealth managers are clearly reviewing their positions and trying to avoid being stuck in those investments which are likely to be most affected.
"We saw similar moves against physical property in the wake of the 2016 referendum, where many property funds were forced to shut, as they could not meet redemptions.
"Similarly, with the IA UK Smaller Companies sector, the reduction in exposure is most likely due to the political risk of a no-deal withdrawal. This is one of the sectors that would likely be hit particularly hard.
"Unlike large cap UK equities, they would not benefit from a potential currency depreciation and the prospects for the UK economy would be seen as poorer."
Director at financial planner Whinchat Chris Wise said the firm had increased its exposure to international markets, such as the US, "given the opportunities for growth" in those markets, while also diversifying its currency risk, particularly sterling "which may or may not weaken further due to Brexit".
He added: "We have also included exposure to inflation-linked assets, through bonds and property.
"While inflation is low at present, having an inflation hedge in the portfolio for clients is important, as some active managers may not consider these investments, due to the possible longer time scale needed, for the potential returns to be generated."