The significant fall in sterling post the EU referendum means investors should sell overseas funds and buy UK funds instead, according to Hawksmoor’s Ben Conway, who has been doing exactly that across his Hawksmoor Distribution and Vanbrugh portfolios over the past few days. 
The surprise Leave victory at last week’s EU referendum has had severe ramifications for the pound, which initially plummeted to its lowest level relative to the US dollar since 1985.
This, in turn, has had a profound effect on investor sentiment towards the UK, with many believing that all sterling assets will be in for an inevitable period of uncertainty while the political and economic backdrop looks ambiguous.
Relative performance of over 1 month
Source: FE Analytics
However, given the severity of sterling’s fall, Conway says UK investors should use this as an opportunity to trim their exposure to overseas funds and use the proceeds to top up their domestic holdings.
In particular, Conway – who co-manages Hawksmoor’s fund of fund range with Richard Scott and Daniel Lockyer – says investors should target funds that focus on mid and small-caps as they have been the hardest hit by the Brexit uncertainty and could therefore be the focus of overseas investors.
“Sterling has weakened by 5 to 10 per cent against all other major currencies,” Conway said.
“If you are a US investor looking at the UK, for example, you will have seen the FTSE 250 has fallen 10 per cent in sterling terms and therefore in US dollar terms the is actually 20 per cent cheaper because of that currency movement.”
Indeed, according to FE Analytics, the FTSE 250 index has lost 10.56 per cent since 24 June in sterling but is down 19.53 per cent in US dollars over that time.
Performance of FTSE 250 in sterling and US dollars since Brexit Friday
Source: FE Analytics
Conway notes that sterling has weakened against every major currency, not just the US dollar, and therefore overseas investors from around the world will now be interested in potential value opportunities within the FTSE. In an upcoming article, FE Trustnet will take a look at which currencies have appreciated the most against sterling since the EU referendum.
Due to this trend, Conway and his team have “done quite a bit of dealing” over the past few days to try and capitalise.
“What we have done is to reduce our overseas exposure, basically because overseas assets have just become 10 per cent more expensive for sterling investors. We have just shaved our overseas fund holdings across the board and it makes an awful lot of sense,” Conway explained.
“On the other hand, what else do we want to do? Well, we want to buy UK equities because not only has sterling gone down a lot, but the prices of the underlying assets have gone down a lot as well.”
“In particular, we are focusing on UK-listed stocks below the FTSE 100 has they are the ones which have been hit the hardest and are therefore clearly more attractive to overseas investors than before.”
Conway isn’t making wholesale changes within his portfolios, however, as he and his team have been nervous about risk assets for some time now. However, for the sakes of efficient portfolio management, he says investors shouldn’t sit and do nothing.
“We still remain nervous about general valuations in the market so this is more of a subtle rebalancing. Sterling is still vulnerable thanks to the UK’s current account deficit, but the picture is by less bad than it was on Friday.”
“I would recommend that investors, when the sterling moves so significantly, start to look for opportunities in the UK.”
Conway has been buying three funds in particular over the past week, all of which have a decent weighting to mid-caps. FE Trustnet will at look at these in more detail over the coming few days.
The manager, whose five crown-rated MI Hawksmoor Vanbrugh fund is the second best performer in the IA Mixed Investment 20%-60% Shares sector since its launch in February 2009 and has nearly doubled the gain of its average peer in the process, says this movement in sterling has also had profound effects on mixed asset funds.
Performance of fund versus sector since launch
Source: FE Analytics
“We’ve been looking at how the mixed asset sectors have been getting on and what is really interesting is that – as a segment of the market – they have performed very well. My guess as to why that has been the case is because the average multi-asset fund has very little in the UK. In other words, currency has been bailing everybody out.”
Indeed, FE data shows that the average weighting within to UK equities within the IA Mixed Investment 0%-35% Shares, IA Mixed Investment 20%-60% Shares, IA Mixed Investment 40%-85% Shares and IA Flexible Investment sector is just 16.28 per cent.
Sectors’ performance since Brexit Friday and weighting to UK equities
Source: FE Analytics
It therefore comes as little surprise that the average return across the four sectors has been 0.66 per cent since the EU referendum compared to a 4.47 per cent loss from the FTSE All Share.
Conway added: “That is actually a perfect illustration as to why investors should consider using these type of funds and why they should try not to have a home bias within their portfolios.”