Emotion overtook logic on 23 June when the UK voted to leave the EU, but managers of the Skagen Tellus fund write in their latest quarterly performance report that they do not believe a Brexit will actually come to pass.
The Tellus fund underperformed its benchmark through the second quarter this year, but Jane Tvedt and Torgeir Høien suggest that this was largely down to short term market reaction to the Brexit vote, and that the situation will reverse moving foward as the market finds an equilibrium position in regards to the expectations around the event.
“It appears as though the market is starting to put the results of the British referendum behind it. The reason is probably that investors believe that that a popular desire to leave the EU may not necessarily result in a so-called Brexit,” Tvedt and Høien write.
“The fact that the EU is more popular among politicians and the establishment than the general public is nothing new. There is also a tradition in the EU that has seen politicians manage with diplomatic and legal agility to keep the union intact after people have expressed their dissatisfaction.”
“We believe it is possible that there will be no Brexit and that the EU may try to keep the UK in. The contagion caused by Brexit could cause the EU to crumble. France, for example, is due to elect a new President next year and only one third of the French are positively inclined towards the EU.”
Overall, the views of Skagen’s equity fund managers is that Brexit will be less felt by long term investors focused on companies. This is because despite the market volatility, fundamentals of many companies remain solid.
Citing a famous slogan from 1939 – ‘Keep calm and carry on’ – Skagen CEO Leif Ola Rød said that while there remains uncertainty around Brexit, the manager’s focus on maintaining active management targeting a high active share is an approach that is not going to change.
“In a world where macro events are driving markets, it can be a challenge for active fund managers such as Skagen to beat the markets, in the short to medium term. In such an environment it might appear tempting for asset managers to construct fund portfolios that largely resemble their benchmarks; this is commonly known as ‘closet indexing’. One study referred to in the Financial Times showed that more than half of all domestic equity funds in Sweden and Poland could be closet trackers. The phenomenon of closet indexing is being studied by regulators throughout Europe with an aim to protect investors from paying for something they are not receiving. In Norway the regulator for consumers, Forbrukerrådet, is now pressing ahead with a law suit against one of the banks due to closet indexing.”