The shock decision by the British people to vote to leave the European Union created havoc on the financial markets when the result of the referendum was announced on June 24. The two main casualties were the sterling dollar exchange rate and the FTSE 250 index that is dominated by domestically focused UK-listed companies.
Those who invest in managed funds are normally fairly well protected against massive price swings by the diversification of the underlying holdings, but analysis by FE Trustnet shows that 17 open-ended funds made returns in excess of 10% on Brexit Friday, while another 50 fell by 7.96% or more.
It is well worth having a look at the data as it makes interesting reading. The top performers were mainly funds that invest in the American stock market or gold producers that benefited from the 10% fall in the value of sterling against the US dollar. At the other end of the scale the worst performers were mostly small and mid-cap funds with exposure to UK companies that would suffer in the event of a recession.
Now that the dust has settled it is a good time to assess how you should react to the challenges and opportunities created by Brexit.
If you think that fall in the pound and the sell-off in some of the UK funds has been overdone you might want to increase your exposure by taking profits from your dollar denominated holdings after their recent gains.
Ben Conway, a fund manager at Hawksmoor, is quoted on Trustnet as having bought into Man GLG Undervalued Assets, MI Downing UK Micro-Cap Growth and Standard Life Investments UK Equity Income Unconstrained.
There could be even bigger gains from some of the worst-hit closed-ended funds as these are now trading at wider than normal discounts to their Net Asset Value (NAV).
Analysis by Stifel Funds shows that there were five investment trusts that fell by more than 15% between the close on Thursday June 23 and close on Tuesday June 28. They were: Electra Private Equity -15.7%, Kennedy Wilson EU Real-Estate -16.8%, Mercantile -17.1%, Aberforth Smaller Companies -17.1% and JPMorgan Mid Cap -19.1%.
Stifel think that it will be ‘business as usual’ for a while and that the de-rating has created some interesting opportunities. They are particularly bullish on TR Property with a buy recommendation – indicating an expected return of more than 10% over the next 12 months – based on a price of 265p.
TR Property invests in the shares of commercial property companies and has experienced a big sell-off after the referendum with its share price falling from 306.5p to 260p. Its underlying portfolio provides exposure to UK and European retail, office and residential properties with the largest holdings including the likes of Unibail-Rodamco and Land Securities. According to Winterflood it is now trading at an 18% discount to NAV.
The investment trust specialists at Winterflood compile a daily list that looks at which funds are cheap compared to their normal level of discount. This currently includes various European funds such as JPM European Growth, European Assets and Fidelity Euro Values, as well as property funds like Standard Life Investments Property, F&C UK Real-Estate Investment and TR Property.
Similar analysis by Killik & Co highlights Woodford Patient Capital, which aims to benefit from the intellectual property being developed out of UK universities. Neil Woodford has had a lot of success in this area in the past but the fund is now trading 19% below its April 2015 issue price of a pound and the 6% discount is the widest it has ever been. The fund has suffered during the recent volatility despite having a significant dollar denominated exposure in the portfolio.
The best strategy all depends on your outlook. If you think that the decision to leave the EU will not have a significant effect on the UK or European economy you might see this as a buying opportunity for equity and property funds with exposure to these markets. Less adventurous investors or those with a more cautious outlook would be better advised to wait for things to calm down as there is likely to be plenty of volatility in the next few weeks. If you jump in now you have to be prepared to risk some short-term losses.