Brexit: How we’re positioning the AJ Bell funds


Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

The markets rallied after the Referendum vote in June 2016 and Trump’s election in November 2016, proving that share price moves are not always in line with economic events.

Matt Brennan, Head of the Passive Funds at AJ Bell, discusses why a No-Deal Brexit might actually lead to positive returns for multi-asset investors and how AJ Bell are positioning the funds ahead of the 31 October deadline.

How Brexit may affect the Markets

The outcome of Brexit is a moving feast. At present it appears that 31 October is the cliff edge, where the UK will either leave with ‘No Deal’, or a renegotiated deal will be struck. But as they say, a week is a long time in politics. By the time this article is disseminated, we could already be in the midst of a general election campaign, with possibilities of an extension, or indeed no Brexit it all.

Whatever the final outcome, it is likely we will see large moves in financial markets, especially the currency markets. The pound has fallen 20% from its peak before the referendum in 2016, with many predicting a further fall of 20% in a stress scenario. On the other hand, a softer exit could see the pound rally back to pre-referendum levels.

We are in the business of long-term investing, rather than short term speculation. As the outcome is uncertain, and may lead to large market moves, we feel it is important to have positions in the portfolio that will help in different scenarios, offsetting loses in other positions. In the longer term we feel the UK economic situation will have little bearing on the performance of a UK investor’s diversified multi-asset portfolio, therefore placing more value in our long term capital market assumptions.

A key difference between market moves now and back in 2016 is the signposting. The vote to leave was taken as a surprise by the markets (despite polls indicating this was the likely outcome). As such the markets reacted sharply to the news. This time around, the situation is more fluid, with news emerging on a daily basis. As such we do not envisage a scenario where markets change in a single day by the same amounts as 2016, although the aggregate move may end up being a similar amount over a series of days or weeks. This gives us the chance to react to any large market moves that we feel are overreactions.

The following is our assessment as to how we think the market will perform under different scenarios in the immediate aftermath.

Source: AJ Bell Investments

The only difference we see in the short term between a ‘Renegotiated Deal’ and a ‘No Brexit’ is the political landscape for how this is achieved. A ‘Renegotiated Deal’ is likely to lead to uncertainty until the 11th hour, but if resolved, is likely to lead to a relief rally in sterling and a focus on a Conservative legislative programme likely to include (promises of) corporate and personal tax rate cuts. On the other hand a ‘No Brexit’ could possibly only be achieved through a general election and the formation of a new government. We categorise a ‘No Brexit’ as either an extension, or the revocation of Article 50.

Using the same scale as above we outline areas of the market that we feel will perform particularly well or badly under the above macro moves.

Source: AJ Bell Investments

The one asset class we see doing well in most scenarios is UK large cap equities. On one hand the majority of earnings from this market are derived from overseas, and would benefit from a further fall in sterling. On the other hand the valuation of the FTSE 100 versus other major indices is at a significant discount. The FTSE 100 trades at a 27% discount compared to the S&P 500 when measured by the Price/Earnings ratio. This is larger than the average discount over the last decade of 16%.

UK large cap makes up between 20 & 30% of our total equity holdings across the AJ Bell passive funds.

In addition we invest a significant part of the funds holdings overseas, in both shares and bonds. Crucially, the majority of this is pointed away from European markets towards the US, Asia and emerging nations. In bonds we have introduced asset classes such as emerging market debt and US treasuries over the last couple of years to further diversify the funds’ holdings

In general we actually expect the funds to perform fairly well in the event of a ‘No Deal’ due to the international bias. Our funds launched in April 2017, so didn’t exist at the time of the referendum vote in June 2016, however back-testing our fund holdings for the month of June 2016 for our Balanced fund shows a positive performance of 4.5% (gross of any fees). We feel this is a good guide for the sort of reaction we could get under a ‘No Deal’ scenario.

However as we have already outlined, it is important to have balancers in the funds given the uncertainty of the outcome. All the funds have an allocation to UK domestic shares, which we feel would outperform in either a ‘Renegotiated Deal’ or ‘No Deal’ scenario. In addition the funds have a holding to UK Property shares, which currently trade at a large discount to the assessed value of the properties.

Ironically in the short term a ‘Renegotiated Deal’ or ‘No Brexit’ could lead to negative performance of the funds, however in the longer term the removal of Brexit uncertainty may lead to strong performance of markets, especially in the UK. As such it is best to keep calm and carry on investing!

So to finally answer the question:

How are we positioning the funds?

Sometimes the best thing to do is nothing.

Given the lack of a clear outcome, making radical changes to our funds will generate significant trading costs, but will not necessarily generate higher returns.

Having already positioned for some sort of compromise back in March, whilst also making sure we have some risk balancers in the case of a different outcome we see no reason to make significant changes.

The central pillar to our investment philosophy is to be long term in nature. The economic fall-out does little to change our long term assumptions, in particular for international markets.

These articles are for information purposes only and are not a personal recommendation or advice.

ajbell_matt_brennan's picture
Written by:
Matt Brennan

Matt Brennan is Head of Investment Management at AJ Bell and is responsible for the day-to-day running of the AJ Bell funds. He has over six years’ experience in financial services, having previously worked at Brown Shipley as a Senior Fund Manager and Head of Fixed Income Research, with specific responsibility for managing a discretionary fixed income fund. He also formed part of a four-person fund management team that ran the company’s multi-asset funds. Matt graduated from the University of York with a first class Masters degree in Mathematics, and is a CFA Charter holder.