Any use of economic arguments within the debate surrounding the impact of ‘Brexit’ is “bogus”, according to star manager Neil Woodford, who says investors need not be concerned about how the in-out referendum could affect the UK economy when building their portfolios. 
While no date is confirmed, the UK will at some point vote to decide its future with the European Union and current opinion polls suggests it will be an extremely tight vote.
Given a hefty dose of Euro-scepticism in the UK’s political system over the past 30 years and recent global events, it is unsurprising that it is such an emotive subject. However, of late, the arguments have increasingly found themselves in the financial pages and have sparked very heated back and forths (as can been seen in a recent FE Trustnet article).
FE Alpha Manager Woodford, who heads up the £7.7bn CF Woodford Equity Income fund and highly-popular Woodford Patient Capital Trust, says the major problem with the issue is that there is a lack of objective and independent research on the economic impact of the UK either maintaining its current relationship with the EU or leaving.
As such, Woodford Investment Management recently commissioned Capital Economics to conduct a report on the subject and, specifically, look how either outcome would affect immigration; trade and the manufacturing industry; financial services and the City, regulation, innovation and productivity; foreign investment; the public sector and consumption and the property market.
The resounding message from the report is that the UK’s future involvement with the EU (either in or out) is likely to have no long-term impact on its economy and Woodford agrees.
Sources of possible gains and losses from Brexit
Source: Capital Economics
“I’ve read reasonably extensively on the subject, I’ve heard both views (i.e. that staying is incredibly beneficial or that leaving would be very damaging) and I’ve heard the opposite argument from an economic point of view,” Woodford (pictured) said.
“Based on the research that we have commissioned from Capital Economics, Lazarus and others, I think that it is pretty clear that is a bogus argument. I think it’s really hard see any significant credibility in an argument to stay or whether to leave constructed around economics.”
He added: “I think it’s a nil sum game, quite frankly, whether we stay or whether we leave.”
The results of the commissioned report found that the more extreme claims about the costs and benefits for the economy are wide of the mark and lacking in evidential bases, that job creation could be negatively or positively impacted and that any costs for financial services are likely to be short term.
“Although the impact of Brexit on the British economy is uncertain, we doubt that Britain’s long-term economic outlook hinges on it,” the report said.
“Things have changed a lot since 1973, when joining the European Economic Community was a big deal for the United Kingdom. There are arguably much more important issues now, such as whether productivity will recover.”
“The shortfall in British productivity relative to its pre-crisis trend is still over 10 per cent, so regaining that lost ground would offset even the most negative of estimates of Brexit on the economy.”
“We continue to think that the United Kingdom’s economic prospects are good whether inside or outside the European Union. Britain has pulled ahead of the European Union in recent years, and we expect that gap to widen over the next few years regardless of whether Brexit occurs.”
Woodford, who has more than tripled the returns of his peer group composite since the turn of the century, says ‘Brexit’ is likely to have implications for parts of financial markets, but says these aren’t like to be major or long term in their nature.
Performance of Woodford versus peer group composite
Source: FE Analytics
“If we stay or if we leave, the fundamentals of the economy will be relatively unmoved. I think there will be a chance the currency will be weaker if we leave and there will be some uncertainty,” he said.
“If the country votes to leave, I think politically that will be a pretty significant event – not just domestically but globally – and it would be significant for a period of time and that may well be reflecting in sterling weakness.”
“However, I think that would be relatively temporary. Funnily enough, though, if the currency is weaker for a period of time that is going to be partially stimulative for the economy, so it might turn out to be quite good news – certainly for exporters, who need all the help they can get at the moment, and for the manufacturing industry.”
Laith Khalaf, senior analyst at Hargreaves Lansdown, agrees that while volatility is likely to increase in the build up to the volatility (like during the Scottish referendum) investors should be making no strategic long-term calls within their portfolio in preparation.
“We will probably see some volatility in financial markets as we approach the vote, particularly if it looks like being a tight call, but investors shouldn’t make decisions about their savings based on whether they think we will end up in or out of Europe,” Khalaf said.
“It’s infinitely more productive to simply spend time considering the basics of investing, such as how much to save, how much risk to take, and how to pick the best investments for your circumstances.”
“Investors who let the chance of a Brexit determine their investment portfolio will probably find themselves flipping their portfolio around depending on the prevailing polls, and almost certainly won’t do themselves any favours in the long run.”
One of the major reasons why Woodford Investment Management commissioned the report was due to several of its clients asking how the vote could affect the CF Woodford Equity Income fund – which has been the best performing IA UK Equity Income portfolio since its launch in June 2014 – and whether or not it had affected the manager’s thinking.
Performance of fund versus sector and index since launch
Source: FE Analytics
Given the portfolio is biased towards large-cap multi-nationals (with the likes of Imperial Brands, AstraZeneca, GlaxoSmithKline and British American Tobacco accounting for a quarter of its total assets) and as Woodford currently holds close to 20 per cent outside of FTSE-listed stocks, he says the fund is unlikely to affected either way.
“The strategy remains the same. Remember the UK economy is important, but not the dominant factor by any means in terms of determining my strategy for the portfolio,” Woodford said.
“Most of the really big companies I invest in really have little interaction with the slings and arrows of the UK economy. Many of them have nothing to do with the UK economy. It does have an influence at the margin in parts of the portfolio, but overall, it is a global perspective that drives strategy.”
