The Global Funds Least Exposed to Brexit

There have been some massive winners and losers since the result of the EU referendum was announced on June 24^th. The main casualties have been UK-listed companies exposed to the domestic economy and their European counterparts, with the biggest beneficiaries being international businesses with dollar denominated earnings.

It is highly likely that the political and economic uncertainty will have a significant negative impact on the UK and European economies and that this could take months or years to play out. Unless you think that the downturn has already been priced in it would make sense to increase your exposure to other areas of the market.

The easiest way to do this would be to invest in a global fund with minimal exposure to the UK and Europe. As long as the mandate is sufficiently flexible this would allow you to leave it up to the manager to decide when best to buy back into these areas.

Analysis by the investment trust specialists at Winterflood shows that some global funds are much less exposed to the UK and Europe than others. A good example is Monks, which before the referendum had just 25% of its portfolio invested across the two regions.

The Monks Investment Trust (MNKS) is managed by a team from Baillie Gifford who took over in March 2015. Their aim is to generate long-term capital growth from an actively managed portfolio of global equities.

At the end of May the largest exposure was the 47% allocation to the US with a further 14% in the Emerging Markets and 8% in Japan. The areas most at risk from Brexit – the UK and Europe – accounted for just 8% and 17% of the portfolio respectively. This is reflected in the performance as the fund is up 4% since June 23^rd, yet its shares are trading at a 14% discount to NAV.

Another fund that should be relatively immune is the £3.6bn Scottish Mortgage Investment Trust (SMT). The managers, James Anderson and Tom Slater of Baillie Gifford, have an unconstrained approach and aim to identify strong businesses with much more upside potential than downside risk.

At the end of May they had a 54-stock portfolio with the largest holdings including the likes of Amazon, Tesla Motors, Baidu, Facebook and Alphabet. The main geographic allocation was the 48% exposure to the US, followed by 17% in China, with the UK and Europe making up just 30% of the portfolio.

Scottish Mortgage is one of the best performing investment trusts in the global sector with a 5-year return of 96.1%. It is also up 9% since the close on June 23, which was the night before the referendum result was announced. The fund is on a 0.5% discount, but normally trades at a small premium.

Income investors may be more interested in the Murray International Investment Trust (MYI). This £1.3bn fund operates in the global equity income sector and is yielding 4.6% with quarterly distributions. It has been managed by Bruce Stout for over 11 years and aims to generate a total return of more than its benchmark (40% UK, 60% world ex UK) while maintaining an above average dividend yield.

Stout looks for stocks based on their quality and value but is not constrained by his benchmark. He has been fairly cautious in recent years and has primarily focused on not losing money, an approach that has led him to include a 15% weighting in fixed interest. At the end of May he had just 27% invested in the UK and Europe, with the largest allocation being the 29% in Asia Pacific. There was also a further 20% in other areas such as the Emerging Markets, which was where he was finding the best opportunities.

This cautious approach means that Murray International has not been one of the strongest performers in the sector but it is still up a creditable 32.7% over 5 years. The fund has done well since the Brexit announcement with a gain of 6.6% yet it is still trading on a wider than average discount to NAV of 5%.

Funds in the global sector with the largest exposure to the UK and Europe include: Majedie (99%), Law Debenture (81%) and Caledonia (65%). Since June 23 these have fallen by 2%, 1.6% and 0.5% respectively.

Global investment trusts like Monks, Scottish Mortgage and Murray International should be relatively immune from weakness in the UK and European stock markets brought about by poor economic data as long as it doesn’t affect investor sentiment elsewhere. These sorts of funds allow you to delegate the asset allocation decision with the managers able to adjust their exposures as events unfold.