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Five UK funds to protect against Brexit volatility

24 February 2016

Now that a date has been set for the EU referendum, a panel of investment professionals tell FE Trustnet which UK funds they are backing to defend against the volatility it may cause later this year.

By Lauren Mason,

Reporter, FE Trustnet

The impending Brexit has been the topic of many macro conversations since the start of the year, with investors reminiscing on the adverse effect that 2014’s Scottish referendum had on market volatility and wondering if we are in for more of the same, or worse.

While sentiment at the end of last year and the start of this year seemed to dictate that the UK was likely to stay within the EU, outlook is now more opaque following Boris Johnson’s declaration of support for an exit yesterday and the announcement that 23 June is the official date set for the referendum.

This increase in uncertainty has been reflected through the vulnerability of sterling as it suffered its biggest drop in almost six years after Johnson’s announcement, falling nearly 2 per cent by the close of play.

As such, FE Trustnet has asked a panel of investment professionals which UK funds investors should be backing to smooth the performance of their portfolios during such an uncertain time.

 

 

Liontrust Special Situations 

Dan Boardman-Weston, head of portfolio management at BRI Wealth Management, would opt for FE Alpha Management duo Anthony Cross (pictured) and Julian Fosh’s Liontrust Special Situations fund as a longer term play.

The managers are well-known for their Economic Advantage stock selection process, which involves finding companies that own intellectual property, have distribution channels or have repeat business – factors they believe are difficult for competitors to replicate.

“The Economic Advantage process that they employ seeks to identify good quality companies that can maintain high levels of profitability over the longer term,” Boardman-Weston said.

“Whilst businesses with the inherent qualities sought by the managers may display lower share price volatility, it is the lower business and profit volatility that is more attractive to us as the economy enters an uncertain period before the EU referendum.”

Since Fosh joined Cross at the helm in June 2008, the four crown-rated fund has provided a total return of 144.92 per cent, outperforming its average peer and its FTSE All Share benchmark by 96.25 and 102.71 percentage points respectively.

Performance of fund vs sector and benchmark under Fosh and Cross

 

Source: FE Analytics

Not only has it delivered a significant outperformance, it has also achieved a top-decile annualised volatility, Sharpe ratio – which measures risk-adjusted returns – and alpha generation. It also has a top-quartile maximum drawdown, which measures the most money an investor would have lost if they’d bought and sold at the worst possible times.

Liontrust Special Situations has a clean ongoing charges figure (OCF) of 0.87 per cent and yields 1.59 per cent.

 

JOHCM UK Opportunities

Managed by FE Alpha Manager John Wood, this five crown-rated fund invests in UK stocks but favours those that derive most of their earnings from other regions.  To choose these, he adopts a top-down view to identify global tailwinds before looking for UK stocks that could benefit from these themes.

Ben Willis, head of research at Whitechurch Securities, says that the fund is a good option for UK investors who are looking for a more defensive play at the moment.


“Wood is known for being a ‘perma-bear’ and so will often take a glass half full when it comes to investing in equity markets,” he explained.

“Wood’s main tenet is that the main risk to a portfolio is holding onto ‘bad’ shares, not from missing out on ‘good’ ones. As such, he can run quite high cash positions if he doesn’t see opportunities within markets.”

JOHCM UK Opportunities currently has an 18.8 per cent cash weighting as well as 25 holdings – 29.1 per cent of these are in industrials, 16.2 per cent are in consumer goods, and 11.2 per cent are in consumer services. The fund also has smaller weightings in oil & gas, utilities, basic materials, healthcare and technology.

Despite being defensive in its nature, the fund has also provided a total return of 129.1 per cent since its launch compared to its sector average’s return of 74.4 per cent and its FTSE All Share benchmark’s return of 72.32 per cent. It also has a top-decile annualised volatility and a top-quartile Sharpe ratio and maximum drawdown over the same time frame.

JOHCM UK Opportunities has clean OCF of 0.81 per cent and yields 2.79 per cent.

 

Threadneedle UK Equity Income

Adrian Lowcock, head of investing at AXA Wealth, says that making an investment decision based on volatility caused by the EU referendum is tricky because nobody knows what the effects will be.

He says that while sterling has fallen which suggests that foreign investors are staying away from the UK, he points out that a weaker currency is good for UK manufacturing and exporters.

“On balance I would go for a UK equity income fund, specifically Threadneedle’s,” he said. “The manager Richard Colwell first establishes his economic view and then looks for companies that will benefit from that picture.”

“He runs a concentrated portfolio with a bias towards FTSE 250 companies. Currently the fund is quite defensively positioned with exposure to pharmaceuticals (12 per cent) and 8 per cent in utilities.  Colwell’s ability to forecast and predict the economic climate combined with excellent stock picking skills makes this an attractive defensive fund.”

Colwell was joined by co-manager Leigh Harrison from 2010 until the latter end of last year when he decided to take a backseat. Over Colwell’s tenure both as co-manager and lead manager, the fund has provided a total return of 82.55 per cent, almost doubling the performance of its FTSE All Share benchmark and outperforming its peer group composite by 20.08 percentage points.

Performance of fund vs sector and benchmark under Colwell

 

Source: FE Analytics

Threadneedle UK Equity Income has a clean OCF of 0.82 per cent and yields 4.3 per cent.


Investec UK Total Return

Ryan Hughes, fund manager at Apollo Multi Asset Management, has been underweight the UK for some time because of the uncertainty that the Brexit situation will bring to the UK market and, for the past year, he has actually been net short the FTSE 100 index.


“This approach is obviously not an option for a lot of investors and therefore if exposure to the UK market is needed, I would look at the Investec UK Total Return fund,” he said.

“This fund is under the radar for most investors as it sits in the specialist sector despite investing in UK equities, but is a good way to gain defensive UK exposure. The fund uses the stock picking skills of Alastair Mundy but reduces market exposure by shorting the overall market, thereby reducing risk and the impact of falling markets.”

“The results have been impressive with the fund significantly outperforming the FTSE All Share Index over the last year when markets have been falling.”

The £91m fund cannot directly be compared to its peers because of its IA Specialist sector. However, it has managed to outperform the FTSE All Share since Mundy and co-manager David Lynch took the helm in 2014, providing an outperformance of 117 basis points with a total return of 2.87 per cent.

It has a 65-stock portfolio, and its top 10 long positions include the likes of GlaxoSmithKline, HSBC and BP.

Investec UK Total Return has a clean OCF of 0.75 per cent and yields 2.04 per cent.

 

Premier Defensive Growth

Also with the ability to short, Premier Defensive Growth resides in the IA Targeted Absolute Return sector and aims to generate positive returns over a rolling 12-month basis. It is benchmarked against the LIBOR GDP 3 Month index and, over five years, it has outperformed this more than five times over with a total return of 17.47 per cent.

Performance of fund vs benchmark over 5yrs

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Source: FE Analytics

The five crown-rated multi-asset fund has been managed by Paul Smith since 2010 and holds the likes of M&G High Income, F&C Global Smaller Companies and Miton Worldwide Growth as part of its 166-holding portfolio, and holds a numbe rof derivatives, investment trusts and property-linked investment vehicles.

“Premier Defensive Growth is a well-managed multi strategy fund with good defensive qualities in turbulent conditions. It also has a team approach which is important,” Neil Shillito, director of SG Wealth Management, said.

Premier Defensive Growth has a clean OCF of 1.11 per cent.

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