Whilst market plunges are unnerving, localised events like those we have seen over the last few weeks once again highlight the importance of a globally diversified portfolio.
Global markets were initially caught off-guard following the result and the pound has slumped to a 30-year low. Subsequently, funds with foreign currency exposure have actually seen an immediate and sizeable upward revaluation.
You may have read about the FTSE250 bearing the brunt of market stress. For large companies, a significantly high proportion of earnings are in foreign currencies, so a fall in sterling equates to an increase in revenue. Medium-sized companies derive less income from overseas and are more exposed to the UK economy. With fears of what Brexit really means for jobs, income and spending, investors have been selling out of mid-sized companies’ en masse, as reflected in a tough couple of weeks for the index.
In terms of our own portfolios; prior to the vote, we had already positioned them defensively. We have identified a number of risks to the global economy; anaemic global growth, the growing debt pile in China, negative interest rates and political uncertainty to name just a few.
To reflect these concerns, we increased our cash holdings, diversified our currency exposure outside the UK, while also reducing our equity and property exposure. These moves have helped to protect portfolios with most of them in positive territory a week after the Brexit vote.
Following the result we have taken the decision to re-position the portfolios. On the Friday (24th June) the result was declared, we sold all our holdings in UK property funds due to concerns about downward pressure in the UK commercial property market. The suspensions of the Standard Life, M&G and Aviva property funds the following week validated this decision.
In equities we have changed the composition of managers to move our investments into larger companies that will be better able to weather the current uncertainty. We have also tilted our portfolios further towards the U.S. and reduced level of exposure to Europe.
Remarks by the governor of the Bank of England, Mark Carney have significantly increased the chances of a base rate cut next week. In anticipation of this, we have introduced a government bond tracker to serve as a defensive asset. We have held our Absolute Return fund exposure at roughly the same level, but with a more defensive composition.
Looking forward, we recognise the risk of a lower growth environment over the coming few years, but believe the portfolios are well-positioned to cope with the challenging conditions.