Some 40 per cent of FE Trustnet readers have significantly repositioned their portfolio ahead of the US presidential election next month, according to our latest poll, but some have warned that isn’t the best course of action.
Meanwhile, 53 per cent have maintained their current positioning and the remaining 7 per cent have made minor changes as a result of the impending vote.
When it comes to preparing a portfolio for geopolitical events, there are convincing arguments both for investors to hold tight or to reposition and potentially cushion any blows to performance.
We’ve already seen moves from candidates affect market behaviour, with Democrat Hillary Clinton’s tweet referring to pharmaceutical price hikes knocking the performance of the NASDAQ index in September last year.
Performance of index since 20 September 2015
Source: FE Analytics
Republican hopeful Donald Trump has also made a series of pronouncements that some suggest would lead to period of uncertainty if he was made president. 
However, the general consensus among a number of industry commentators is that investors should refrain from altering their portfolios until the US election results are announced.
Neil Shillito (pictured), investment consultant and co-fund manager at Downing, says companies always transcend politics over the long term even if markets take an immediate tumble, which he says is a possibility if a controversial figure wins the election.
“I think it’s very, very dangerous to take pre-emptive action on the basis of what might happen,” he warned.
“There’s a big different between, for instance, the outcome of the election in the US and the outlook for the US. An investor might be thinking, ‘never mind the politics, the US is slowing down, the PMI data is not that good and unemployment is rising. Therefore, I think I’m going to underweight the US’. That’s a pretty rational argument for rebalancing.
“However, I think it’s irrational to reposition your portfolio on the expectation that something may or may not happen. You don’t know whether it’s going to be Trump or whether it’s going to be Clinton and you don’t know what the impact of either of those candidates winning the election will be.”
Ben Conway, senior fund manager at Hawksmoor, agrees that investors shouldn’t reposition in the run-up to the election and points out that portfolios should be diversified enough to cope with a multitude of scenarios.
As such, his team will never position their portfolio to profit from what he deems to be an unforecastable binary event.
“The odds are circa 70/30 in favour of Clinton. Positioning the portfolio to profit from a win in either direction is akin to gambling. Moreover, even if you knew which candidate was going to win, do you really know how the market will react?
“A good portfolio should be ‘election-proofed’ already by dint of its diversification and exposure to an uncorrelated selection of assets, each with a margin of safety.”
Equilibrium’s Mike Deverell says that the election is just one of the risks facing US stock market investors at the moment and has therefore taken a broader view on the market area.
He is currently underweight US equities, although he says this is mainly because it looks expensive relative to earnings. That said, the exposure to the US market he does have is mostly in tracker funds, given the market’s efficiency. He also holds some of his US weighting in the JP Morgan US Equity Income fund as it has a focus on growth in terms of both revenues and dividends.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
“The election is an additional risk and it’s fair to say that Wall Street would react badly should Trump become president,” he said.
“However, the US political system makes it notoriously difficult for a president to put his or her policies into place as they still have to get laws through Congress and the Senate. Given this and as Clinton is ahead in the polls anyway, I would not be making any changes just because of the election.
“The possibility of the Fed putting rates up is also equally as big a risk for US stocks, and the rest of the world, as a Trump victory.”
On the other hand, Hargreaves Hale’s Neil Jones says that both candidates pose as potential market risks in different areas and, as such, he says it makes sense for investors to review their portfolios.
As with Deverell though, he says these risks need to be considered in conjunction with other US and global market headwinds.
“US investments have definitely had a strong run and one of the things Trump is certainly championing is trying to weaken the US dollar, so that they can benefit from the same things we’re going through at the moment,” he explained.
“I think there would be some potential dollar weakness and you could see a knock in value for UK-based investors if he does get in. Then of course, if Hillary gets in, that’s probably deemed to be negative for the healthcare sector and therefore may have implications for some of the big UK pharmaceutical companies.
“It’s not specifically election-related, but we have been mindful of trimming our US exposure a little. However, this is more just because of general strength of the market and not being too over-exposed to it rather than a specific election concern.”
On 21 September last year, Clinton published a tweet in relation to “price gouging” within specialty drug markets. Over the following week, the NASDAQ Biotechnology index fell by 14.5 per cent in dollar terms and is still down 20 per cent to-date.
The candidate has also bruised the performance of biotech shares since, with US pharma giant Mylan falling by more than 5.5 per cent on 24 August this year after she criticised the price increase of their ‘EpiPens’.
That said, Sanlam FOUR’s Colin McQueen - who runs their Global Equity and Stable Global Equity funds - holds his largest weighting in the healthcare sector. He doesn’t believe that a Clinton victory would necessarily cause the sector to tank.
“The implementation of Obamacare opened up a lot of opportunities, but as for Hillary and her position on healthcare, what we have found over many years watching this space is that it is often very difficult for any president to get any major changes through the US Congress and Senate – despite it being a hot topic for candidates to mention,” he said.
“US political views are incredibly polarised right now, which means it is difficult to enact any meaningful change one way or the other when these people come together. We believe the rhetoric is much louder than what the reality will be.”
Shillito agrees, pointing out that comments from politicians won’t affect company fundamentals and that worldwide macroeconomic events such as global growth slowdown should take precedent.
He also says that people are more fearful of what market reactions will be as opposed to the event itself, which he says simply cannot be pre-empted.
“People were very fearful of Brexit on the actual day of the vote and the initial reaction from the FTSE on the 24 June, the FTSE plummeted by about 8 per cent. But, this was only for 30 minutes and then look what happened,” he reasoned.
Performance of index after 23 June 2016
Source: FE Analytics
“The reaction will be whatever it will be but there’s nothing you can do about it and, perversely, it could be the opposite of what you might think.”