The uncertainty surrounding a potential Brexit has led Neptune’s Robin Geffen to maintain zero exposure to the UK within his Global Equity and Global Alpha funds. 
The UK’s referendum on its future relationship with the EU – which will take place on 23 June – is one of the biggest ‘known unknowns’ within today’s market as polls suggest it will be a close run contest, even though the consensual view is there will be no change to the status quo.
While there have been many reports highlighting the potential economic impact Brexit might have on the UK and which areas of the market would be most affected, many believe it is almost guaranteed that the uncertainty in the build up to the vote will create widespread volatility within the FTSE All Share.
This Brexit-induced uncertainty has already had an impact in a number of ways such as sterling weakness and a general widening of discounts within the various UK equity investment trust sectors.
Performance of sterling over 1yr
Source: FE Analytics
Given his view that volatility within the UK equity market is only going to increase over the next two months thanks to this uncertainty, Geffen – who takes a highly unconstrained approach to global investing – sees no reason to have exposure to the FTSE All Share in his portfolios.
“I share quite a lot of peoples’ concerns about the UK and Europe. I don’t have any exposure to those in my global funds,” Geffen (pictured) said.
Geffen has had no exposure to the UK in his global funds for some time now, telling FE Trustnet in December 2014 that the rising political uncertainty meant the risks outweighed the potential rewards.
“I see ahead of us the most difficult general election in several generations, which has been further complicated by Alex Salmond’s determination to rip the heart out of Labour’s vote in Scotland. We have UKIP who will, despite what many pundits think, take seats across the board from all three major political parties and you get left with a serious political conundrum,” Geffen said.
“Markets don’t like uncertainty and there is massive uncertainty in the political landscape in the UK. Massive uncertainty.”
While the Tories managed to take a surprise majority at the polls and UKIP’s impact was very limited, Geffen’s decision to take have no exposure to the UK but be overweight the US and Japan has –from face value – been fruitful as the graph below shows.
Performance of indices since Geffen’s comments
Source: FE Analytics
That being said, the FTSE All Share has risen 9 per cent, certain UK funds – mainly lower-cap focused portfolios – have delivered strong double-digit gains and both Geffen’s global funds are bottom decile in their respective sectors over that time.
Nevertheless, with political risk still prominent, Geffen has seen no reason to change his stance.
“I was concerned about the election in the UK and about the issues in Greece and that has now come together in a type of unholy trinity with the possible meltdown in Greece and David Cameron putting his head on the line in terms of date for a referendum vote,” he said on a recent Neptune trip to the US.
“None of us were terribly comfortable about the Scottish referendum – that was too close to call.”
“Our business is to find quality companies at good prices and to ensure a balanced and diversified portfolio. At the same, though, we can’t take undue risks.”
Though many (such as Neil Woodford) argue that potential impact of a leave or remain vote should be completely ignored in the Brexit debate, Schroders senior European economist Azad Zangana says the uncertainty is already starting to take its toll.
"The Office for National Statistics (ONS) estimates UK GDP to have grown by 0.4 per cent in the first quarter of 2016 – a slowdown compared to the 0.6 per cent quarterly growth rate recorded previously,” Zangana said.
“Recent business surveys suggest nervousness amongst firms in the run up to the UK’s referendum on its EU membership, which may be prompting companies to postpone investment and hiring plans. This was also evident in the business investment figures in the second half of last year and the most recent labour market statistics, which show a severe slowdown in employment growth.”
“The estimates released today are preliminary estimates, and may be revised up or down. However, it appears that the economy has hit a speed bump. Growth is likely to remain sluggish until the result of the referendum is known. If the UK votes to remain in the EU then growth is likely to accelerate significantly in the second half of the year.”
“If, however, the UK votes to leave, then growth is likely to slow further on the back of the added uncertainty for businesses.”
It’s not just Brexit uncertainty which is pushing Geffen – who has comfortably beaten his peer group composite since the turn of the century – away from the UK.
Performance of Geffen versus peer group composite
Source: FE Analytics
Indeed, though the manager is avoiding domestic-listed stocks, he also runs the Neptune Income fund – which sits in the IA UK Equity Income sector.
In that fund, Geffen runs a highly differentiated portfolio as he counts the likes of Apple, Merck & Co and Microsoft, again reflecting his distaste for UK equities. He says the other major reason for this is the concerns surrounding the dividend outlook.
Many have warned that dividend cuts will increase materially across the FTSE 100 thanks to falling earnings growth, falling dividend cover but high pay-out ratios. Geffen agrees this, combined with Brexit uncertainty, is a nasty combination.
“I am wary of having too much exposure to the UK domestic economy in my Neptune Income fund, in light of the troubling dividend outlook for a number of companies,” he said.
“Dividend cover across a number of sectors is at multi-year lows, and further sterling weakness in the lead up to the Brexit vote remains a distinct possibility. As a result, I am actively targeting companies that derive a hefty chunk of their earnings from overseas – particularly the US.”
“We see the US economy as going from strength to strength, and expect the currency to continue to strengthen versus sterling.”
In his global funds, Geffen has been upping his exposure to emerging markets – as FE Trustnet covered recently – and has maintained high weightings to Japan and the US.
Alex Paget was recently a guest of Neptune Investment Management on a research trip to San Francisco.