By Danielle Levy of Citywire

Investors who are avoiding UK equity funds may find they are sleep walking into a currency trap, warns Bestinvest’s Jason Hollands.

UK-based investors run the risk of sleep walking into a currency trap, according to Bestinvest managing director Jason Hollands.

Fund sales data from the Investment Association shows that investors shunned UK equity funds during February, opting for funds with an international focus. Global funds led the way, attracting £257 million in net new money, followed by Japan with £93 million. North American and European equity funds were tied in third place with £31 million in inflows apiece.

By comparison, UK funds saw net outflows of £350 million.

Investors may think that avoiding UK equities represents a defensive move due to the market volatility and sterling weakness that followed the UK’s vote in favour of leaving the European Union. However, Bestinvest’s Hollands warns that this positioning could backfire because of the currency risk that investors are unwittingly taking on board.

‘Arguably Brexit pessimism is well priced in given the sabre rattling that points to the potential for a so-called “hard Brexit”. But if sterling manages to claw back some of the ground it has lost over the last year, then UK investors who have deployed their weakened pounds into overseas equities, especially at a time of historically stretched valuations, could be in for a nasty surprise further down the line,’ Hollands said.

Over the past 12 months, currency moves have been a key driver of returns for UK-based investors who backed stocks with international earnings. However, Hollands says it could prove risky to assume a continuation of the status quo.

‘Views on the direction of sterling are quite polarised within the investment community at the moment and currency shifts are notoriously difficult to predict. What we do know is that currency markets can move with extreme speed and brutality and therefore this will be an acute risk for UK investors buying overseas assets in the short to medium term,’ he added.

This article is independently written by Citywire and not subject to editorial oversight by Blackrock