If an EU withdrawal bill is passed by the end of October or the option of a ‘no deal’ Brexit is finally removed from the table, there could be some major beneficiaries amongst the UK-oriented investment trusts.
There is obviously still a huge amount of uncertainty about what is going to happen, but it seems as though there is a reasonable chance that the Prime Minister will either get a last minute deal or be removed from office to eliminate the threat of crashing out without an agreement.
UK small and mid-cap companies
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The analysts at Stifel believe that the main beneficiaries of any sort of deal would be the investment trusts that focus on UK small and mid-cap companies. Many of these businesses tend to operate in sectors that are largely concentrated on domestic earnings such as housebuilders, leisure and entertainment.
Stifel point out that the FTSE 250 index of mid-cap stocks troughed in the middle of August at a time when there was a lot of talk of a ‘no-deal’ outcome, but it has since experienced a marked recovery as hopes of a potential deal have risen.
On days when the news flow suggests that an agreement may be possible, the shares in UK focused companies such as the housebuilders have risen sharply and vice versa, which implies that if a deal is agreed there could be the scope for a significant re-rating.
The two ‘pure mid cap’ trusts are JPMorgan Mid Cap (LON:JMF) and Schroder UK Mid Cap (LON:SCP), which are trading on discounts of nine percent and fifteen percent respectively. If there was a deal and a sharp pickup in performance then these discounts could narrow quite considerably.
High weightings in FTSE 250 companies
A lot of the investment trusts that are classed as small cap also have relatively high weightings in FTSE 250 companies, either due to the fact that the managers have held on to their winners or because they invest across a broader capitalisation universe. Prime examples are Henderson Smaller(LON:HSL), which at the end of Augusthad a 60% exposure to this part of the market, and Montanaro UK Smaller (LON: MTU), where the figure was 54%.
Many of the mid and- small-cap trusts provide access to experienced management teams with good long-term track records. Stifel’s preferred options for exposure to growth stocks include Henderson Smaller (LON:HSL),on which they have a neutral recommendation and BlackRock Throgmorton (LON:THRG), where they have a positive view. These are available on a nine and two percent discounts respectively.
If you prefer value stocks, which have typically been even more out-of-favour, they have a positive recommendation on Aberforth Smaller Companies (LON:ASL), which is trading on a ten percent discount. Alternatively there is Mercantile (LON:MRC) which they say offers reasonable value on a nine percent discount with three-quarters of the portfolio in the mid-caps.
It is anybody’s guess how Brexit will finally pan out, but it certainly seems as though there is a lot of value in domestically-oriented trusts in any scenario other than a last minute no deal exit. Cautious investors could reduce the risk by holding part of their portfolio in overseas funds or a gold ETF to benefit from a hard Brexit inspired collapse in the pound.