The battle lines are now firmly drawn ahead of the UK’s referendum, with both the leave and remain campaigns putting forward their final cases before the vote next Thursday. 
The fact that the leave campaign has gathered momentum over recent weeks, according to various polls, has only created greater uncertainty within financial markets as investors have started contemplate what outcome a ‘Brexit’ would have on the economy and their capital.
According to FE Analytics, both sterling and the UK equity market have fallen over the past month, while 10-year gilt yields dropped to a record low of 1.22 per cent – reflecting a general flight to safety.
Performance of indices over 1month
Source: FE Analytics
However, investment is supposed to be a long-term game. All the market noise surrounding the vote is therefore a major distraction to investors who are trying to ascertain what goal they are trying to achieve.
Indeed, Tilney Bestinvest’s Jason Hollands says investors need to focus on greater challenges facing their portfolios other than the short-term volatility a leave vote would likely generate. His thoughts, in that respect, are akin to star manager Neil Woodford who said Brexit was the least of his worries at the moment.
“Brexit aside, the big challenges for markets is that after years of money printing and ultra low interest rates, asset prices have been inflated and monetary policy is running out of road at a time when growth is feeble,” Hollands (pictured) said.
As such, here he highlights five funds which he believes are relatively well positioned for a more uncertain market climate.
First and foremost, Hollands thinks taking a value-orientated strategy (despite the fact such a style has severely underperformed for some time now) will be beneficial for the foreseeable future and rates FE Alpha Manager John Wood’s JOHCM UK Opportunities for that sort of exposure.
“Wood has adopted Warren Buffet’s maxim of ‘Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1’ as his motto and this fund comprises a concentrated portfolio, currently of 27 stocks, which are mostly large, high quality growth companies with robust balance sheets and predictable cash flow generation,” Hollands said.
“The fund has been running with a sizable cash weighting – currently 19.3 per cent – for some time, reflecting Wood’s cautious view on the markets which long pre-dates the Brexit campaign, and is instead predicated on the distortions caused to asset prices by central bank stimulus policies.”
Wood launched his five crown-rated JOHCM UK Opportunities fund in November 2005, over which time it has been a top quartile performer in the IA UK All Companies sector with returns of 141.50 per cent meaning it has doubled the FTSE All Share’s gains in the process.
His focus on downside protection has meant the fund has tended to lag in rallying markets, yet it is among the peer group’s top decile for maximum drawdown, annualised volatility and risk-adjusted returns since launch.
The £1.6bn fund – which counts the likes of Royal Dutch Shell, Centric and Experian as top 10 holdings – has an ongoing charges figure (OCF) of 0.83 per cent but does charge a performance fee.
Though FE Alpha Managers Anthony Cross and Julian Fosh adopts a growth approach, Hollands believes it is one of the best UK portfolios available to investors who want a sturdy UK equity fund.
“While this fund does have quite high weightings to small and mid-sized companies, parts of the market that could come under pressure, the fund has a very clear and distinctive process, dubbed the ‘Economic Advantage’ approach, that has proven very successful in tougher markets and should help the fund to weather periods of weak growth,” Hollands said.
“The managers look for companies with durable characteristics, such as ownership of intellectual property, recurring revenue streams and strong distribution channels, that enable them to sustain above-average growth throughout the economic cycle.”
The £1.8bn Liontrust Special Situations fund was also launched in November 2005 and has been a top decile performer in the sector with returns of 250.22 per cent.
Performance of fund versus sector and index since launch
Source: FE Analytics
Cross and Fosh’s approach has led to highly consistent market-beating returns, with Liontrust Special Situations having outperformed the index in nine of the last 10 calendar years – seven of which it was also top quartile performer.
As a result, the fund is also one of the best performers for capital preservation over the longer term. Liontrust Special Situations has an OCF of 0.88 per cent.
Threadneedle UK Absolute Alpha
Of course, the fact that UK equities may be hit by an extended period of volatility (Brexit-induced or not) means investors may wish to seek funds that can make money from upward and downward movements in markets.
Hollands says the idea behind picking such a strategy is attractive, but investors need to do their analysis on which funds can deliver the right type of performance profile they are hoping for given the varying options in the space.
“In an environment of lower growth, just being ‘in the market’ through say an index fund is unlikely to be the best strategy compared to both picking winners and identifying losers. Long/short funds have the tools to try and generate returns out of both the stocks that deliver and those that don’t,” Hollands said.
He added: “One of our favoured funds with such a strategy is Threadneedle UK Absolute Alpha, managed by Mark Westwood and Chris Kinder.”
Westwood and Kinder launched the £1bn five crown-rated fund – which sits in the IA Targeted Absolute Return sector – in September 2010.
FE data shows Threadneedle UK Absolute Alpha has delivered returns slightly lower than the FTSE All Share over that time, but with a third of the maximum drawdown and annualised volatility. It has also come into its own in the recent volatility, meaning the fund has nearly doubled the returns of the index over three years and, again, has delivered a far smoother ride.
The managers currently has 60.7 per cent of their portfolio in long positions, with the remainder of their assets in shorts. The fund has an OCF of 0.87 per cent, though that doesn’t include its performance fee.
Lazard Global Listed Infrastructure Equity
Hollands says that diversification within a portfolio will be crucial over the coming years given how many asset classes have become increasingly correlated following a lengthy period of extraordinary central bank intervention.
As such, he argues investors should also look to niche areas of the market to help protect their capital.
“In a world of struggling growth, it could make sense to invest in infrastructure i.e. businesses involved in projects such as transport networks (toll roads, railways, airports and ports) and utilities, which often have monopoly-like characteristics, where demand is constant and revenues are contractually adjusted for inflation,” he said.
“Infrastructure spending it typically orchestrated by governments and is very long term in nature and may be accelerated in tougher economic times to help stimulate economies.”
One of his favourites in this space is Lazard Global Listed Infrastructure Equity, which is managed by John Mulquiney and Warryn Robertson, sits in the offshore universe but carries five FE Crowns.
The £780m fund invests in companies focused across global industrials, utilities and services industries.
Performance of fund versus index since launch
Source: FE Analytics
Since its launch in July 2012, the fund has beaten the likes of the FTSE Global Infrastructure index by some 20 percentage points with its gains of more than 70 per cent. It was also comfortably outperforming in 2016 with decent double-digit returns, but witnessed a sharp sell-off last month.
Its OCF is 1.09 per cent.
Finally, Hollands says investors may wish to choose a core defensive multi-asset fund to weather the upcoming volatility.
There are a number of managers who have made a name for themselves in that respect, but Hollands says FE Alpha Manager Sebastian Lyon (as a result of his work on Troy Trojan) is one of the best in the business.
“This multi-asset fund, managed by Sebastian Lyon at Troy Asset Management, has a strong emphasis on capital preservation and is therefore built for tougher times rather than bull markets. The fund invests in equities, index-linked bonds, gold and cash and short-dated bonds,” he said.
“The defensive positioning of the fund is reflected with a 27 per cent holding in cash and near cash instruments.”
The £2.9bn Trojan fund was launched in May 2001 and Lyon has become renowned, certainly in recent years, for his more bearish attitude towards markets which centre on his belief that central banks have done nothing but distort the financial system since the last crash.
Since inception, it has one of the best performers in the IA Flexible Investment sector and more than doubled the returns of the FTSE All Share with gains of 202.84 per cent. It has also had a very low maximum drawdown but high risk-adjusted returns thanks to its performance during the global financial crisis (it made a 1.11 per cent return in 2008 when UK equities fell 30 per cent).
Though Lyon has been accused of being dogmatically bearish during the rising markets of 2012 and 2013 (a period when his fund struggled from an absolute and relative basis), his decision to hold high levels of cash, gold, index-linked gilts and to only stick to blue-chips for his equity exposure has paid dividends of late.
For example, Trojan – which has an OCF of 1.05 per cent – has made 9 per cent over 12 months with no major drawdowns while the FTSE All Share has lost 7 per cent.