“Difficulties mastered are opportunities won”. Winston Churchill famously uttered these words in a speech on 21st March, 1943, at the height of the Second World War. As we have seen, the UK has been thrown into a state of flux following Friday’s vote. However, as always, this also represents opportunities; the question is how to take advantage of those?
As many of our clients hold Wellian portfolios, we decided to speak to Richard Philbin, Chief Investment Officer at Wellian Investment Solutions earlier this week.
Although this absolutely does not constitute a recommendation to invest in Wellian (we are of course, independent and use a range of investment firms), we thought it might be helpful to hear their house view on the decision to leave and how that may impact decisions taken in relation to their portfolios.
So we asked Richard (RP) a number of questions:
CG – Had you known the result in advance, how would you have positioned the portfolios?
RP – Hindsight is a wonderful thing. We are longer term investors and have been changing the shape of the portfolios for quite some time now – it is better to close the stable door BEFORE the horse bolts. We also build portfolios to be diversified across geographies, styles, asset classes and so on, whilst still being very mindful of the risk profile and investment objectives of the underlying client. We often use the following (potentially flippant) saying “if you’ve bought a toaster, you expect it to cook bread, you don’t expect it to change into a washing machine.”
We build and monitor our portfolios to meet defined risk boundaries as well, and had been aware that correlations and risks were rising in the UK, so we reduced UK exposure to a number of funds. In a couple of models we increased our cash weight too.
With perfect hindsight, you would be fully weighted in equity until Thursday night and then go short Sterling, and correspondingly long US Dollars (USD). You would have increased exposure to gold. Then, this morning (28th June) you would have gone back into the market….
I guess the question could also be phrased along the lines of “how far in advance would we have known the outcome?” Our models have performed very well over the past couple of days – our funds are not 100% exposed to the UK stock market, and even though we do have some exposure to the domestic market which has hurt, we have been increasing our international holdings and diversification which would have benefited from the currency weakness. A good example would be the purchase of Fundsmith Equity which we placed into a number of models almost 5 months ago. It accounts for instance 8% in the Growth model.
CG – How are investment managers taking advantage of this uncertainty?
RP – A very good question. I have been talking to a number of fund managers in the last couple of days; collating their views and thinking about the future, and the vast majority are talking about “caution.” The dust is far from settled – politically the Conservative and Labour parties are rudderless, Article 50 – the now famous Article 50 – has not yet been invoked, and there is no precedent regarding how a European “divorce” will happen. All we know is that it will take some time and not be painless.
Some indices have sold off dramatically – especially the Small Cap and Mid 250 indices, and within these there have been some large movements – stocks within the retail, real estate, construction sectors (and many more) for instance are down greater than 20%. Some approaching 50%. This means there will be opportunities – for domestic as well as international buyers (just think – US investors can now gain an extra 10% due to currency movement alone…)
In the large cap space, insurance and banking stocks have taken a beating – financial services is seen in the immediate term to likely be a large “loser” and that is not too surprising all in all. The fear of inflation, interest rates, corporate failure, bad debts and so on weigh on the mind of the market.
There will be opportunities – the market is both “a weighing machine as well as a voting machine” when it comes to share prices.
Liquidity seems to be fine (unlike 2008) which should give some comfort to market participants. I only know of one major “winner” – Crispin Odey – who runs a hedge fund – where his portfolio was up greater than 15% on Friday alone. But, his fund is still massively down on the year….
CG – In light of the decision, do you foresee any immediate portfolio changes?
RP – I don’t think “immediate” changes are on the cards – we will closely monitor the situation. I would imagine over the next couple of months though that we might increase our exposure to the UK due to the benefits already gained from the weakening currency and the recent stock market sell-off. We do not know if the sell-off witnessed on Friday and Monday is a knee-jerk reaction or the start of something greater. Fortune favours the brave, but I don’t think it is our job to be super “brave” at the moment.
Our portfolios are diverse and we will have had some funds deliver excellent numbers as well as some that have disappointed. But, we are happy with this approach and aim to deliver outperformance over the medium to long-term.
CG – The biggest casualty to date seems to be Sterling. How have portfolios been affected by this?
RP – It is very interesting to see that Sterling has been the main “casualty” of Brexit. The Bank of England is independent and has the ability to print money. Over the past 12 months or so Sterling has weakened against most currencies – the Euro and the US Dollar especially. Of course our funds would have taken some impact from having UK holdings, and to a certain extent, the old “pound in your pocket” saying still remains. We have been increasing our international holdings over the past couple of months, and the translation effect of Dollars to Sterling or Euros to Sterling will have positively impacted returns.
It is (sorry for sounding like a stuck record here) still very early to say whether the short-term weakness in Sterling will become long-term weakness, but companies that export will be beneficiaries and the UK does operate within a global marketplace. Japan has been trying for years to weaken their currency and would love to see the Yen fall to such an extent.
CG – Looking forward, what are the key points for clients to be optimistic about?
- The UK stock market has a great deal of businesses that are both inward and external looking when it comes to revenues, profits and therefore there will be winners in this recent “turmoil”. We have global leaders in many market segments and there will be opportunities.
- When markets sell off, dividend yields rise (although you need to be mindful of pay out ratios.) With interest rates low, inflation muted (but this could change if Sterling remains weak) and yields on gilts touching less than 1% yesterday for the 10Y Treasury, sometimes taking risk when others are taking cover could provide a very timely investment return.
- Interest rates could fall at the next BoE meeting (July). Low interest charges can be translated into higher profits.
- The UK is very entrepreneurial in spirit. (Potentially) less legal constraints due to Brexit can free up innovation
- The UK is still 0:00 on GMT. We speak the global language of business and have some of the best laws in the world. London is a global city and will always attract foreign money – whether that be for business, property or leisure spend. It’s now 10% cheaper to come… Maybe the leisure industry will be a big winner.
Although we are going through a turbulent time, it is precisely these moments that can create opportunities. It is important though to make sure you are as comfortable as possible with everything that’s going on – remember your plan and work it patiently.
We are always happy to answer any questions you may have and to discuss any concerns you or your friends and family may have.