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Brexit uncertainty: Three funds that could weather the volatility

24 June 2016

Following today’s momentous news, Chelsea’s Darius McDermott highlights three funds investors may wish to consider.

By Alex Paget,

News Editor, FE Trustnet

What an eventful morning this has turned out to be.  

Though for most of the past week we were led to believe the UK would continue to remain a member of the European Union, some 17.4 million Britons voted for the complete opposite at yesterday’s referendum meaning that ‘Brexit’ is now indeed a reality. 

It’s fair to say markets weren’t prepared for it either. Sterling, though has shown some signs of stabilising at the time of writing, had the worst day in its history and fell to its lowest level relative to the dollar since the mid-1980s while the FTSE 100 initially plunged 10 per cent this morning (but has since recovered to a degree).

Gold, on the other hand, jumped by 22 per cent in sterling terms on the back of the news. Then there are 10-year gilt yields, which have plunged to their lowest ever level at just above 1 per cent.

There is undoubtedly a huge amount of uncertainty surrounding UK financial assets and the economy (even more so now David Cameron has resigned as prime minister) and the fact the negotiation period to leave the EU will last two years suggests it isn’t going to dissipate anytime soon.

As such, Darius McDermott – managing director at Chelsea Financial – says fund investors need to tread carefully when it comes to portfolio construction. Nevertheless, he says there is no need to panic.

“Markets are likely to be volatile in a general downward direction for a while, not helped by the fact that there are other big issues in the world that could also have an impact: China slowing, the US election and now possible contagion of Brexit to Frexit etc,” McDermott    said.

“But the world won't end. And as we know from quite recent experience, markets bounce back and good companies continue to thrive in the longer term. I would actually even be tempted to buy into the market dips – not huge amounts, but small lump sums.” 

In this article, McDermott highlights three funds he believes could rise out the almost certain volatility.

 

BlackRock Gold & General

The price of gold has already rallied substantially in sterling terms this morning, so McDermott says Evy Hambro’s BlackRock Gold & General fund and its focus on gold mining stocks (which tend to be a high beta play on the precious metal’s price) is a good option in the current environment.

“Gold is a hedge against uncertainty and there is likely to be a lot of uncertainty in the coming months,” McDermott said.

“Other EU countries may demand their own referendums. Volatility is likely to increase. On top of this, the global economy is fragile. Some exposure to a gold equity fund should help hedge against these risks.”

Gold mining equities, up until recently, had been massively out of favour due to a falling gold price and poor company management within the space. However, as macroeconomic headwinds have intensified, they have rallied back strongly in 2016.

The £1.2bn fund – which has five FE Crowns – tended to hold up better than most during the poor years for gold miners but that has meant it has lagged during the 100 per cent return rally since November last year.

Performance of fund versus peers and sector over 3yrs

 

Source: FE Analytics

Nevertheless, the fund has still outperformed both its FTSE Gold Mines benchmark and the average IA Gold fund over three years with gains of 28.97 per cent. The fund, which has an ongoing charges figure (OCF) of 1.17 per cent, is overweight mid-caps relative to its benchmark.

 


Premier Defensive Growth

Taking an absolute return strategy at this point in time seems sensible, according to McDermott, who says focusing on funds that can grind out low but positive returns and anchor an overall portfolio will be beneficial.

His preferred option, therefore, is the five crown-rated Premier Defensive Growth fund, which is managed by Paul Smith.

“This is an absolute return fund that seeks to deliver positive returns in all market conditions,” he said.

“The fund is unlikely to shoot the lights but has consistently delivered a good return in a wide variety of market conditions. It could be a good option for an uncertain world where cash interest rates are close to zero. The fund has an excellent record of protecting investors in falling markets.”

Premier Defensive Growth differentiates itself from most of the other IA Targeted Absolute Return funds given it only takes long bets on the market. However, its risk-adjusted returns have been strong nonetheless.

Performance of fund versus indices since launch

 

Source: FE Analytics

According to FE Analytics, it has returned 20.13 per cent since launch in December 2010. While that is considerably lower than the returns from equities and bonds, Premier Defensive Growth has had a maximum drawdown of just 2 per cent (compared to 16 per cent from equities) and annualised volatility which is some 14 times lower than the FTSE All Share.

The fund invests across bonds, equities and currencies and has an OCF of 0.86 per cent.

 

Evenlode Income

McDermott doesn’t think investors should give up on UK equities altogether, despite the Brexit vote.

He says certain managers may be able to benefit from the volatility and sterling weakness, such as Hugh Yarrow and Ben Peters on the five crown-rated Evenlode Income fund.

“One for those who want to be a little bit more contrarian. This is a core UK income fund that has relatively little domestic UK exposure. The fund invests in very high quality defensive companies,” McDermott said.


“Top holdings include Unilever, Diageo, Sage, GlaxoSmithKline and AstraZeneca. These stocks might get caught up in an initial sell-off but they could actually benefit from a weaker pound. These are large global companies which a significant part of their sales outside the UK.”

“If sterling remains low for some time, this could actually lead to their earnings going up.”  

The £665m Evenlode Income fund had been one of the best performing members of the IA UK Equity Income sector until it was moved to the IA UK All Companies sector after failing to meet the former’s yield requirement.

Performance of fund versus sectors and index since launch

 

Source: FE Analytics

Nevertheless, it has nearly doubled the returns of the FTSE All Share since inception with gains of 124.21 per cent. On top of that, it has beaten the index in each calendar year over that time thanks to its focus on high quality, dividend paying companies with reliable earnings.

It has also been one of the best UK funds at protecting capital over that time.

Though the yield on the fund has dropped to 3.7 per cent due to strong unit price performance, Evenlode Income has increased its dividend in every year and paid out slightly more than the IA UK Equity Income sector average in total income since launch.

Its OCF is 0.95 per cent. 
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