* Dividend funds, index trackers dominate inflows
* Foreign buyers put off by sterling slide
* Handful of large-caps soaking up flows
* GRAPHIC: FTSE 100 vs FTSE 250: bit.ly/2e3GHSu
* GRAPHIC: The pound's slide: tmsnrt.rs/2egbfVh
By Vikram Subhedar
LONDON, Oct 13 As sterling plumbs the depths,
foreign investors are withdrawing from British stocks and
leaving domestic funds to push the benchmark bluechip index to
record highs - for now.
But some investors are growing nervous about how long the
sterling-based funds, insulated from the pound's slide and drawn
by healthy dividend yields, will continue to fill the gap.
The FTSE 100's sharp recovery from lows after
Britons voted to leave the European Union in June stands in
stark contrast to a darkening outlook for the pound and the
In sterling terms, London-listed stocks have raced to their
highest ever levels even though investment funds have continued
to bleed money, share valuations are near multi-year highs and
the outlook for earnings remains muted.
Data from Thomson Reuters Lipper shows that from June to
September, UK-focused equity funds suffered outflows of more
than 3 billion pounds ($3.73 billion).
Much of this appears to have been pulled by investors based
in dollars or euros. While the FTSE is up nine percent from the
EU referendum day of June 23, the pound has lost 18 and 15
percent respectively against their home currencies - wiping out
their notional gains.
At its latest policy meeting, the Bank of England noted
estimates from S&P Global Market Intelligence suggesting that
net purchases of FTSE 100 shares by non-residents in July and
August were about half of the average monthly inflows last year.
Still, the FTSE 100 rose 13 percent from June to September
and is up by more than fifth since its lows in July following
the shock referendum result.
The composition of the UK index along with the kind of
investors active in the market helps to shed some light on what
is underpinning stocks.
Dominated by large, dividend-paying, global companies - many
of which receive a big earnings boost when they bring offshore
revenues home thanks to the weak pound - the FTSE 100 hit the
sweet spot in a world where yields on investments are scarce.
With yields on British government bonds near rock-bottom,
this is particularly the case for domestic investors for whom
currency is less of a factor.
"The UK remains an attractive place for investors seeking
dividends; there are 15 companies with an indicative dividend
yield of over five percent, which is significant when compared
to the one percent yield on 10-year gilts," said Matthew
Beesley, a portfolio manager and Head of Global Equities at
Henderson Global Investors.
Less than 10 percent of the roughly 600 UK-focused equity
funds tracked by Lipper have enjoyed net inflows since June.
Inflows are heavily skewed towards so-called income funds, which
aim to pay their unit holders dividends, and tracker funds,
which passively buy stocks in a given index.
Nick Train's $3 billion UK equity fund, which had a fifth of
the fund in shares of drinks group Diageo and consumer
goods giant Unilever at the end of September, attracted
the most inflows with more than $440 million.
Both Diageo and Unilever exemplify the kinds of major stocks
that investors have increasingly gravitated to since the Brexit
vote, drawn by their dividends, relatively low reliance on the
British economy and the boost from offshore revenues.
British fund supermarket Hargreaves Landsdown,
which caters largely to domestic retail investors, on Thursday
posted record profits and assets under management for its latest
quarter, but said investors' confidence had fallen and this
could weigh on future business.
Equity income funds were in demand in a low interest rate
environment, chief executive Ian Gorham told Reuters.
The large dividend payers are also among the biggest listed
firms in the UK and with the FTSE 100 weighted by
market-capitalisation, the larger a firm the more influence its
wields on the index's moves.
Just 10 large stocks make up nearly half the market-cap of
the FTSE 100. Exchange-traded funds (ETFs) based on the index,
which overwhelmingly favour bigger stocks, are the only other
group to have seen inflows since June.
Oil majors BP and Royal Dutch Shell
and emerging markets-focused banks HSBC and drugs group
AstraZeneca, are all big outperformers and have been key
in lifting the broader index.
Eric Moore, a portfolio manager of the Miton UK Income fund
who holds AstraZeneca shares, says the company is one among a
handful that pays out dividends in appreciating U.S. dollars,
making them even more attractive to British investors.
"It may be a one-off mechanical adjustment but right here,
right now the impact is real. It's money in the bank," said
Moore, who adds, however, that the sustainability of dividends
are a concern as payouts have grown faster than a recovery in
The view from across the Atlantic is less sanguine.
Offshore investors are less enthusiastic about investing in
UK assets due to the growing likelihood of a "hard" Brexit - in
which Britain leaves the EU's single market in order to impose
controls on immigration, disrupting access to its main trading
More than half of UK stocks are held by overseas investors,
according to the latest data from Britain's Office for National
Statistics. Foreign holdings were less than 10 percent in the
1970s and 1980s, and stood at around 35 percent at the turn of
Cumberland Advisors, a Florida-based investment firm that
uses mostly ETFs, points out that the main UK ETF used by U.S.
investors, the iShares MSCI United Kingdom ETF, has lost
money this year. A currency-hedged version is up, though the
fund's assets under management are considerably smaller.
Bill Witherell, chief global economist at Cumberland
Advisors, said a weaker pound is positive for UK multinational
firms only as long as single-market access continues.
"The prospect of a weaker domestic economy and heightened
policy uncertainty lead us to maintain our maximum underweight
of the UK in our International, Global, and Tactical Trend ETF
Portfolios," said Witherell.
The FTSE 100's climb above the 7,000 point level has taken
valuations to 16 times forward earnings, close to the highest in
It has brought back some uncomfortable memories. The three
instances when the index was around these levels were just
before the dotcom bust in 1999-2000, the collapse of the
Northern Rock bank in 2007 and during last year's Greek debt
"After 20 years in the business, I can't help but feel a
little jittery about the FTSE around here," said Moore.
($1 = 0.8042 pounds)
(Additional reporting by Danilo Masoni in MILAN and Simon
Jessop in LONDON, Editing by Mike Dolan and David Stamp)