FE Alpha Manager Mark Barnett (pictured) took the decision to up his exposure to a number of holdings in his portfolio following the immediate negative reaction of markets after the EU referendum results were announced. 
The manager, who runs the five crown-rated Invesco Perpetual Income, Invesco Perpetual High Income and Invesco Perpetual UK Strategic funds, believed at the time that many areas of the market had been oversold in a knee jerk reaction.
Following the shock announcement of a ‘leave’ majority vote on Friday morning, the FTSE 100 index closed on a 3.15 per cent loss that day having initially tumbled by more than 10 per cent.
Sterling was hardest hit though, with its value falling to levels that hadn’t been seen in more than 30 years.
Bizarrely, the FTSE 100 has since returned to pre-Brexit levels and, at close of play yesterday evening, had reached its highest level so far this year.
Performance of index in 2016
Source: FE Analytics
In an article published yesterday, a selection of investment professionals warned FE Trustnet that these heady heights should not be celebrated just yet, given that most of this performance has been driven by a small handful of global-facing stocks that trade in dollars and account for a disproportionate amount of the index.
Joe Rundle, head of trading at ETX Capital, said: “The likes of Fresnillo, Randgold, AstraZeneca, Royal Dutch Shell, British American Tobacco – these are hardly dependent on, or reflective of, the UK economy. They’re listed in London but their earnings come from abroad.”
“There is a key distinction. UK-focused firms are doing much, much worse. EasyJet, Lloyds, Barclays, RBS, Barratt, Taylor Wimpey – they’ve all recorded 20 per cent losses since the Brexit vote.”
This divergence between global-facing and domestic-facing UK stocks can be shown through the performance of the FTSE 250 versus the blue-chip index; over the last month, the former has lost 5.32 per cent while the latter is up 4.06 per cent.
Performance of indices over 1month
Source: FE Analytics
The shock reversal in the behaviour of the FTSE 100 over the last couple of days has stood FE Alpha Manager Barnett in good stead, given that he saw it as an opportunity to increase his exposure to global-facing UK blue-chips while the home market was still depressed.
“The move in share prices that we’ve seen in the first two days post the vote has shown that the market is very quick to price in an extremely pessimistic scenario for the UK which could be overly bearish and be factoring in too much pessimism,” he said on Wednesday.
“To a certain extent I have taken the opportunity to add to existing positions where there has been a very sharp sell-off.”
“I think one of the areas of relevance here is that, at points at which we get a big political macro move in the economy, a lot of shares are traded without regard to the fundamentals, they just happen to be proxies for an ETF position that happens to be buying or selling that particular theme.”
“What we’ve seen in stock prices is potentially some excessive moves in areas where it’s overly discounted based on a pessimistic scenario.”
In terms of his portfolio weightings before the referendum, the manager said that positioning for a binary outcome is incredibly difficult.
Generally speaking though, he says that he has been accounting for heightened political risk in the UK and the fact that the macroeconomic backdrop is likely to become more difficult over the medium term.
“To be honest there are other factors that continue to dominate the investment landscape long after this vote will have been forgotten and those are the more important issues that I’m thinking of with regard to portfolio construction,” Barnett said.
“Our [investment] strategy has been in place for a while now and I do think there are some major issues concerning global economies and stock markets that are not changed by the results of the referendum.”
“[There are] issues surrounding a very large increase in debt that we’ve had over the last five years or so, demographics – especially in the developed world, the impact of technology on all business models and how that plays through. These are multi-year issues that are not affected by the results of the referendum.”
“There are bigger picture issues that I’m thinking through and have been thinking through with regard to portfolio construction.”
Barnett says that the initial negative reaction to the referendum result was expected given that the stock market had been pricing in a ‘remain’ majority.
He explains that the divergence between the performance of sectors is interesting, given that domestic areas of the market such as housebuilders, banks and leisure companies have fallen particularly sharply.
Generally speaking though, he expects the UK market to remain volatile over the medium term for reasons aside from the Brexit vote.
“Overall I would expect the market to remain nervous given the political backdrop and the vacuum in leadership that we face from both of the major parties at this point in time and, actually, that will cloud the appetite for new buyers of UK equities,” the manager continued.
“It also means the risk premium for UK equities in particular is more heightened than it has been for many years.”
“There are counter-balances to this, particularly coming back to currency and the way that behaves. For a company that’s generating most of its earnings outside of the UK, weak sterling is actually of benefit to the shareholders.”
Year-to-date, Barnett has marginally underperformed his peer group composite by 83 basis points with an average return of 5.56 per cent.
Performance of manager vs composite in 2016
Source: FE Analytics
However, he has comfortably outperformed his composite over one, three, five and 10-year time frames, having more than doubled his peer average over the last decade.
