Skip to the content

Last minute pre-election portfolio changes the experts are backing

05 May 2015

FE Trustnet reveals what Brewin Dolphin and other discretionary fund managers have been doing to their portfolios ahead of the election.

By Daniel Lanyon,

Reporter, FE Trustnet

For investors in funds and investment trusts there is very little time to make portfolio changes ahead of the forthcoming general election on Thursday in either a strategic or defensive fashion.

The 7 May UK general election is widely expected to be a close run-off between Labour and the Conservatives, while the host of fringe parties that now make up about 33 per cent of votes, according to polls, likely to play a decisive role in a coalition or minority government.

The Tories are ahead with 34 per cent, while Labour is on 33 per cent, UKIP on 14 per cent and the Lib Dems on 8 per cent, according to the BBC’s latest poll of polls.

The outlook is highly uncertain with polls suggesting no clear winners. David Page, senior economist at AXA Investment Managers, says the government is likely to formed by “the others” and points out that each possible combination of parties brings its own problems.

“In macro terms, an EU referendum under a Tory-led majority would likely have an adverse impact. A likely fiscal relaxation under Labour-led combinations would likely lift short-term activity but see interest rates rise more quickly,” he said.

“We think markets would react most positively to policies that were closer to the political centre ground.”

In light of this, how have discretionary fund managers been preparing their portfolios for the volatility that is expected to hit markets?

Guy Foster (pictured), head of research at Brewin Dolphin, says the firm has not made huge portfolio changes because of the uncertainty, believing the likely result is some form of government that is relatively weak which he thinks will be good for markets as radical policy changes will be unlikely.

  However, he says the firm has been scaling back exposure to UK-listed utilities companies – the likes of British Gas, SSE and Scottish Power – in the belief they’re the most at-risk part of the UK equity market.

“We have a pretty cautious view on utilities. It seems very unlikely that anyone is going to take control completely but if it is a progressive government then it is right to avoid utilities,” he said.

“The market as a whole won’t be as badly affected but the pound could be a bit weaker. However, that would be positive for translated earnings on the basis that growth will be weaker with left-wing government than a right-wing government.”

“By and large the most important thing is that no potential government will likely do very much, which is an ideal environment for investors – the sort of environment the US spends most of its time in, with the White  House saying one thing and Congress saying the other.”

Andrew Phillips, head of research at Balkerne Asset Management, says the team will not make any tilts in their discretionary portfolios, preferring to ignore “the noise”.

“Keep calm and stay invested is my advice. Stock markets do get nervous around elections but there is a lot of hype and the long-term effects on elections are not usually harmful. Except for Ted Heath in the 1970s, which was extremely harmful.”


However, Phillips says if Labour’s Ed Miliband wins there could well be a currency crisis in sterling markets.

“This doesn’t really affect us [Balkerne] because he [Miliband] will then be forced to something about it.”

Sterling is down more than 10 per cent against the US dollar over the past year with some particularly sharp swings in recent days.

Performance of sterling versus dollar over 1yr

Source: FE Analytics

Peter Lowman, chief investment officer at Investment Quorum, says he also expects currency volatility, which he says could filter into broader equity markets.

To dodge this, as well as taking money away from a market the firm believes is mostly fully valued, it has been selling down passive exposure to UK equities in its portfolios and scooping up special situations managers.

“We’ve got about 40 per cent in the UK in our growth portfolio, mostly in special situations and stock-specific managers and those running undervalued assets funds. We were in index tracker funds but we sold out of those recently. However, we usually take a long-term view and bought the trackers in 2009 and made some good money.”

“We are in funds like Miton UK Value Opportunities, Lindsell Train UK Equity and Franklin UK Managers Focus.”

Miton UK Value Opportunities is headed up by George Godber, Lindsell Train UK Equity by FE Alpha Manager Nick Train and Franklin UK Managers Focus fund is co-managed by Paul Spencer, Mark Hall and Ben Russon, who are all FE Alpha Managers, as well as Richard Bullas and Colin Morton.

Over the past three years, all are ahead of the FTSE All Share with the Franklin and Miton funds more than doubling the index’s gain.


Performance of fund and index over 3yrs

 
Source: FE Analytics

“They all are really good managers trying to eke out the undervalued stocks; a lot of stuff in the FTSE 100 looks fully valued. The types of stocks that the managers go for should be less volatile [than large caps] as they are relatively cheap and shouldn’t be hurt whoever wins,” Lowman said.

“However, I’m honestly most worried about whether Chinese growth is going to slow to 5 per cent and if America is overheated.”

 

 

 

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.