Brexit Vote: Why we mitigated the risks


AN ALL-WEATHER APPROACH

We devote considerable thought to constructing all-weather portfolios that are robust and well able to withstand short-term buffeting. For some time, for a number of reasons, we have been fairly cautiously positioned. 

After months of sometimes acrimonious campaigning by politicians, the UK electorate has decided: the result of yesterday’s referendum is to Leave the EU. UK equity markets opened lower on the news, much as we had anticipated in the event of a vote to Leave.

While we made no forecast as to the outcome of the vote, we ensured that in the event of a vote to Leave we would be well covered.

For some time we have been underweight UK equities across our multi-asset funds, which means that they will be less affected by UK market volatility.

Sterling has also fallen sharply against a basket of currencies, on the news of the vote to Leave. Well before the referendum we put into US dollars about 3% of all our portfolios that would normally be converted to sterling, to guard against a fall in the pound.

We also moved underweight property, again well before the referendum, mindful of the risks to this asset class.

HEDGING RISK

Another area where we have mitigated the risks of Brexit is in the bond market. Well before the vote, we sold 10 year Italian government bonds and bought comparable German government debt. Our thinking was that a vote to Leave could lead investors to question the coherence of the eurozone, with likely downward pressure on peripheral European countries including Italy. By contrast, German government bonds are seen as a safe haven.

The cash levels across our portfolios are also more than adequate, putting us in a strong position to manage liquidity risk even during a time of market stress.

THE MERITS OF RELATIVE CAUTION

We take a long-term approach to investing, because the evidence shows that this leads to better outcomes for investors. Our asset allocation is not built on predictions of binary events, such as the referendum, but on a detailed analysis of asset valuations, technical features of the market, the economy, and companies. This analysis had led us to be fairly cautiously positioned.

You might be forgiven for thinking otherwise, but there has more going on than the UK’s referendum on the EU. There has been, and still is, considerable concern that the equity market may be reaching a very late stage in its multi-year cycle. A number of fundamental and technical reasons had led us to be fairly cautious on equities.

Among my main concerns are the market’s almost obsessive focus on the actions of the US Federal Reserve (Fed), and its consequent inattention to fundamentals. One of the reasons Brexit fears have swayed markets so strongly over recent weeks is that Janet Yellen, chair of the Fed, mentioned, at her recent press conference, Brexit as a risk. Yellen’s explicit linking of Fed policy to Brexit meant that markets have been reacting to it more than they would otherwise have done.

MANAGERS FOR THE LONG TERM

The benefits of using multi-asset funds include diversification, and outsourcing asset allocation to specialists who have the resources to take optimal decisions.

Across our multi-asset funds, we emphasise allocation to managers who have consistent and repeatable investment processes, and who share our strong focus on the long term. Conversely, we have sought to avoid managers with more speculative investment approaches.

The Old Mutual Wealth investment division fund manager research team has been busy speaking with dozens of managers over recent weeks. Our findings from these conversations have generally been very reassuring: the message from these underlying managers has overwhelmingly been that many of them have slightly raised their cash levels, but that they have in general avoided making significant changes to portfolios.

TIME IN THE MARKET

A long-term approach to investing produces the best outcomes for investors. We believe that time in the market is more important than trying to time the market. Investors often try to second-guess market movements, jumping in and out; but far more effective is for them to stay invested and keep adding funds on a regular basis, even when prices have fallen. By continuing to invest when prices are lower, investors experience the benefits of pound cost averaging. When prices are falling, the same amount of pounds will buy more shares, allowing the investor to benefit when prices later rise again.



FUND MANAGER

ANTHONY GILLHAM

Anthony joined Old Mutual in 2000 and is co-investment director of our multi-asset unit.

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