The best funds for Brexit

It is hard to believe that so little progress has been made in the two-and-a-half years since the UK voted to leave the European Union. The 29 March deadline is almost upon us, yet the question of whether we will face a hard or soft Brexit remains unresolved and the outcome still has the potential to have a major impact on investor portfolios.

One of the most objective ways of measuring the effect of the Brexit uncertainty on the country’s share prices is to look at the relative performance of the UK Brexit High 50 and Low 50 benchmarks. The first of these contains the 50 companies in the Cboe 100 UK Index that derive the largest portions of their revenues from the UK, while the latter has the 50 with the lowest.

Both indices start on the 31 December 2015. The UK Brexit High 50 was still trading close to its opening level on the day of the referendum on 23 June 2016, but plunged around 20% after the result was announced. It has since recovered some of the lost ground, although at time of writing it was still down around 8% from the end of 2015.

The Brexit Low 50 index rose on the day of the referendum, due largely to the fall in the pound boosting the value of the constituent stocks’ overseas earnings, but it has been drifting lower in recent months. At time of writing it was trading at around 13,500 points, which represents a gain of about 35% over the period that the index has been calculated.

As you would expect, the High 50 contains the most domestically-oriented stocks listed on the London Stock Exchange and includes the likes of Barclays, Lloyds, Sainsbury, Tesco, Persimmon and Taylor Wimpey. Its Low 50 counterpart is more internationally exposed with companies such as British American Tobacco, Burberry, Diageo and Unilever.

Funds that are exposed to the sort of stocks in the High 50 index have been through a tough time and would probably sell-off even more in the event of a hard Brexit. Any other outcome could result in a Brexit bounce, while the Low 50 stocks would be expected to give back some of their gains as the stronger pound erodes the value of their overseas earnings.

Done deal

Patrick Connolly, a Chartered Financial Planner at Chase de Vere Independent Financial Advisers, says that if Parliament agrees some form of deal and we leave the EU on 29 March it is likely to be perceived as positive news by the markets and we could see a rally in domestic, mid and small cap UK stocks.

“However, sterling is likely to strengthen, which would be bad news for many FTSE 100 companies that earn a significant proportion of their revenue from overseas, as this would then be worth less when converted back to sterling. It would also be bad news for UK investors with overseas assets.”

One fund that could benefit from this scenario is Liontrust UK Smaller Companies, which is high risk, but works really well for those taking a long-term view.


“It has achieved an impressive track record as the managers have focused on investing in companies that have a sustainable advantage that is difficult for its competitors to replicate; this could be having high recurring income, distribution networks, or intellectual property such as brand and culture,” explains Connolly.

He also suggests M&G Property Portfolio, a diversified commercial property fund that benefits from having one of the most experienced management teams in the sector. It has a yield of 3.2% and could profit from any upturn in sentiment about the prospects for the UK economy, although there could be liquidity issues in the event of a no deal.

Soft Brexit

Adrian Lowcock, Head of Personal Investing at Willis Owen, says that a soft Brexit might not be as big a deal as many people think, in which case the CF Woodford UK Equity Income fund could do well.

“Neil Woodford has always believed that Brexit wouldn’t be as significant for the UK economy as many others believed. The CF Woodford Equity Income fund has been positioned for this view for some time and the performance has suffered because of it, but this reflects the contrarian, high-conviction, long-term approach of the manager.”

Woodford Equity Income has a greater exposure to stocks found at the lower end of the market-cap scale and to unquoted companies than in funds Woodford has previously managed.

Darius McDermott, MD of Chelsea Financial Services, warns that even if a deal is agreed the UK would still need to get through a lot of ‘unknowns’ until things settle down.

“In this scenario we would pick a sterling strategic bond fund like GAM Star Credit Opportunities, which can be flexible if things change. The fund seeks to produce a high level of income by investing predominantly in investment grade bonds.”

It is a ‘safety first’ fund with very low turnover, as the managers’ process looks for bonds they can buy and hold for 10 years. Very little of what they own yields less than 6% at the initial purchase point and this gives them far less interest rate sensitivity than many of their peers.

Brexit bounce

Any outcome that avoids a hard Brexit would also be beneficial for a number of domestically focused investment trusts. A prime example is the £1.5bn Edinburgh Investment Trust (LON:EDIN), which has been recommended by the analysts at Numis and Canaccord Genuity.

Manager Mark Barnett looks for undervalued businesses with strong balance sheets and disciplined management that prioritise dividend growth over the long-term. He has built up a good track record, but the recent performance has been poor because of his large exposure to cheaply valued domestic stocks.

Barnett believes that the valuations of many stocks are pricing in a hard Brexit and a UK recession, with investors willing to pay twice as much for UK companies generating US revenues as those coming from UK businesses. He thinks that this valuation differential is extreme and has been increasing his domestic exposure while selling companies with international revenues.


Another investment trust that would benefit from a soft Brexit is the £973m Temple Bar (LON:TMPL), run by the highly experienced Alastair Mundy. Mundy takes a contrarian approach and invests in undervalued, out-of-favour companies with strong balance sheets. He has an excellent long-term record, although the recent performance has been mixed as value stocks have languished behind growth, yet it is still on the Numis list of recommendations for 2019.

Alex Wright, who runs the £829m Fidelity Special Values (LON:FSV), would also be expected to benefit from a soft Brexit. He is a contrarian investor who looks for unloved stocks that have limited downside and where there is a catalyst for change. This approach has enabled him to build up an excellent record since taking over the fund in September 2012, due in part to the fact that he has little exposure to large-cap defensive stocks such as those operating in the Tobacco and Pharmaceutical sectors.

No deal

If Parliament can’t agree a deal and the UK leaves the EU on WTO terms, it would mean more uncertainty, which would be bad news for domestically-focused stocks including the majority of mid and small cap companies. Investors can protect themselves from this sort of scenario by holding FTSE 100 stocks with significant international earnings, as well as overseas funds, as these would all benefit from the fall in the value of the pound.

Connolly says that one of the cheapest ways to profit would be to invest in the HSBC FTSE 100 Index, a tracker fund that replicates the performance of the FTSE 100 and has ongoing charges of just 0.1%. Its largest holdings will always be the UK-listed companies with the highest market capitalisations. These currently include the likes of HSBC, Royal Dutch Shell, BP and British American Tobacco. 

Another option that he likes is Rathbone Global Opportunities, whichhas been managed by James Thomson since 2003, during which time he has established a strong track record. The fund invests predominantly in the US and Europe with the manager looking for under-the-radar and out-of-favour growth companies.

Lowcock prefers the Lindsell Train UK Equity fund that he says is packed full of great British companies that are competitive on the world stage and which would benefit from a weaker pound.

“Manager Nick Train looks for unique and high-quality companies that offer a high and sustainable return on investment, show low capital intensity, and are cash-generative. The result is a concentrated portfolio that has generated strong performance and unusually consistent relative returns over the medium to longer term.”

Overseas funds

Another way to benefit from the fall in the pound would be to invest in an overseas fund that provides exposure to other currencies. A good example according to McDermott is Lazard US Equity Concentrated, which is fully invested in dollar denominated assets.

“It is extremely concentrated, typically holding no more than 20 to 25 companies, ranging in size from the fairly small all the way through to the very large. It contains the best ideas from across Lazard’s US equity range.”


Lowcock suggests JPM Japan because he says Japanese equities are cheap and the currency is often seen as a safe haven for investors during difficult times.

“Manager Nicholas Weindling has consistently demonstrated a firm understanding of the companies he invests in and has applied a quality-growth investment philosophy to generate excellent returns over the long-term. The focus is on quality smaller companies that have good visibility on future earnings, with Weindling running a high conviction portfolio of future winners.”

Carry on regardless 

Some funds should be able to continue to deliver and perform irrespective of the Brexit outcome and these provide a way to remain invested without taking on too much event risk. A good example is Merian UK Smaller Companies Focus, where the manager invests in excellent companies that are able to drive their own growth. Another option would be an absolute return fund that can make money from falling as well as rising prices. Many of these have failed to deliver, but BlackRock UK Absolute Alpha might fare better. It is a UK equity long/short fund that aims to achieve a positive absolute return regardless of market conditions. 

FUND OF THE MONTH

Gary Channon, the manager of the Aurora Investment Trust (LON:ARR), believes that the negative sentiment around Brexit has pushed the price of domestically exposed UK stocks well below their intrinsic value and that the short-term uncertainty has created a great buying opportunity.

Channon and his team focus on stock picking and adopt a contrarian value approach driven by in-depth fundamental research, with the aim being to identify companies with a strong business franchise, a high return on capital and good management.

This strategy has enabled them to draw up a candidate universe of between 70 and 90 UK stocks, which they then monitor over extended periods to see whether a value opportunity arises that would allow them to buy at an attractive entry point.

The fund has an extremely concentrated portfolio of 12 to 20 UK-listed stocks and at the end of December, the 10 largest holdings accounted for 77% of the net assets. These included the likes of GlaxoSmithKline, Sports Direct, Lloyds Bank, Bellway, Dignity, Tesco, Stanley Gibbons and Redrow. The biggest sector exposures at the end of June were Retail (30%), Finance (20%) and Leisure (13%).

Aurora’s high exposure to consumer stocks makes the fund extremely sensitive to the UK’s economic cycle and this means that a favourable outcome of the Brexit negotiations could result in a period of excellent returns. The investment trust analysts at Winterflood have included it as one of their recommendations for the year.

Fund Facts

Name: Aurora Investment Trust (LON:ARR)
Type: Investment Company
Sector: UK Growth
Total Assets: £110m
Launch Date: March 1997
Current Yield: 1.4%
Net Gearing: 0%
Ongoing Charges: 0.54%
Website: www.aurorainvestmenttrust.com/