Mixed views on UK referendum outcome

As voting continued in the UK on the referendum whether to remain a member of the European Union, there were mixed views on the importance of the outcome, both for open and closed ended funds.

Speaking from Norway – itself of course not a member of the EU – Espen Furnes (pictured), manager of the Delphi Europe fund said that overall the outcome was not something that was causing significant stress.

“Actually, we’re not that concerned about the effects of a possible Brexit.”

“Yes, we’ve sold off some of our UK positions the last months, but still have a decent exposure. We’ve also tried to invest in UK companies that are more or less agnostic to the Brexit issue, where a large portion of their revenues are derived from abroad. We have to large extent avoided UK banking stocks – so far. The short term effects of a Brexit are likely to be limited, we foresee a 5%-10% fall in stock prices if the is an exit, and probably 3%-5% upside if they remain. So we can’t imagine any doomsday scenario for European equities with a Brexit.”

In terms of the experience of working in a non-EU jurisdiction exporting funds into the EU, Furnes adds that a Brexit is also not necessarily something that will cause significant problems for UK based asset managers.

“All the standards one have to comply with as an asset manager will in probably be the same, Brexit or not. Our own legislation is to a large extent harmonised to the EU standards, meaning that in reality there should be no major practical issues from a Brexit. Also there is a minimum two year period before an eventual exit, which would give the ample room to adjust any adversities in legislation.”

Closed ended funds

Simon Elliott and Keiran Drake, research analysts at Winterflood Securities in the UK meanwhile have outlined their thoughts on which investment trusts – UK-listed investment companies – that may benefit from a relief rally – assuming that the outcome is to remain in the EU.

“In the event that the UK votes to remain in the EU, we would expect a relief rally, which arguably has already started, in predominantly UK focused businesses. As such, we would not be surprised to see a strong short term fillip to mid and small cap companies. We believe that investment trusts are a good way of playing any such rally due to the impact of gearing and, more importantly, the possibility that discounts might narrow as a result of renewed buying interest.”

“Our favoured names in this space remain The Mercantile Investment Trust and Henderson Smaller Companies. Both offer some value on discounts of 13% and 14% respectively to their NAV. Mercantile has the advantage of greater liquidity with a market cap of £1.6bn, although Henderson Smaller Companies also offers good liquidity in the secondary market and has a market cap of £452m. We do not believe that a bounce would be confined purely to UK Mid and Small caps and our favoured more mainstream UK names include Temple Bar (7% discount), managed by Alastair Mundy of Investec AM,
and Fidelity Special Values (3% discount), which is managed by Alex Wright.”

“The patterns of the last week suggest that it is not just the UK market that would receive a ‘shot in the arm’ in the event of a ‘remain’ result. We suspect that it would be perceived to be a good result for Europe in general and would expect funds such as Jupiter European Opportunities (3% discount) to benefit. Another Pan‐European fund that should, in our opinion, be assisted by a ‘remain’ outcome would be TR Property (7% discount), which is managed by Marcus Phayre‐Mudge of BMO Global AM.”

“If the UK votes to leave the EU today we would expect a negative reaction from equity markets and a sell‐off in sterling. A sizeable stock market crash cannot be discounted but even in the event of a more moderate sell‐off, it seems reasonable to assume that discounts will widen across the investment trust sector. In the event of a ‘leave’ result there are certain funds amongst our long‐term recommendations that we would expect to outperform, certainly on a relative basis.”

“This includes Personal Assets, managed by Sebastian Lyon of Troy Asset Management. This fund has the objective to “protect and increase (in that order) the value of shareholders’ funds” and invests in a wide range of asset classes including equities, index‐linked bonds and gold. Furthermore the fund, which has a market cap of £648m, has a well‐established zero‐discount policy and so the risk of discount volatility is essentially eliminated. One of the ramifications of a ‘leave’ outcome could be further central bank
intervention, possibly including the bond market. We believe that this would indirectly benefit City Merchants High Yield (3% premium), which invests in high yield credit and is predominantly exposed to European issuers.”

“There is likely to be substantial movements in currency markets as a result of a successful leave vote and we suspect a number of our recommendations may be advantaged by this. While private equity funds invariably struggle in a ‘risk‐off’ environment, we believe that Pantheon International looks an interesting ‘post‐Brexit’ play as a result of its exposure to US dollar denominated assets and its already wide discount, which is currently 27%.”

“Another beneficiary of currency moves could be Baillie Gifford Japan (2% discount). The Japanese yen is seen as a safe currency in times of market stress and has already appreciated by 13% against sterling so far this year. This may have further to go. Murray
International (6% premium) could also benefit from sterling weakness, both in capital value terms but also in terms of its revenues. With a dividend yield of 4.8%, its dividend cover could be boosted.”

“Another fund that could benefit from volatility in the currency markets is BH Macro (10% discount). It focuses on interest rates and FX strategies and historically volatility in these areas has provided greater opportunities for the fund. In addition, it has tended to have a relatively low correlation with equity markets and the preservation of capital remains a key objective for the manager.”

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