Brexit leaves wealth managers divided

It is becoming increasingly more difficult to predict what the next step, or speed bump, will be for the UK to leave the European Union as the Brexit deadline on 31 October approaches.

As a result of the political events and its implications being impossible to forecast, many portfolio managers have made little to no changes to their investment strategies as a direct result of Brexit.

Dan Kemp, chief investment officer at Morningstar Investment Management, spoke with ETF Stream about the company’s minimal preparation for Brexit as “politics is an unreliable indicator of returns”.

However, this does not mean Morningstar’s portfolios have remained unchanged for the last 18 months. Kemp said: “We have adjusted the portfolios as the price of assets have changed relative to their fair value.

“In particular, we have reduced our exposure to bonds, both government and corporate, as yields have declined and they have become less attractive as diversifying assets.”

In contrast to Morningstar, investment platform Nutmeg has a different stance towards bonds having added to its gilts positions since the deadline extension implemented in April.

Nutmeg appears to have a clearer view of what could happen in the near future following numerous shifts in the landscape.

James McManus, head of ETF research at Nutmeg, said: “We remain of the view that the most likely course of action in the coming months is an election, likely caused by a continued harder line from the Conservative government.

“This will likely lead to a no-confidence vote by MP’s looking to prevent a no-deal Brexit, which in turn leads to an early election regardless of whether a caretaker government of national unity can be formed.”

Despite the increasing likelihood of a no-deal, there are only a few market participants that appear to have a no deal as their base case at present, according to McManus.

This would suggest “there would be further downside for some UK assets in the event of a no deal scenario,” McManus continued.

Nutmeg remains underweight in FTSE 250 companies due to their domestic bias as the platform is deterred by an election environment that potentially casts a hard Brexit agenda against a Jeremy Corbyn led government.

Morningstar differs to this position as it has an ongoing preference for UK equities over other countries. Kemp said: “Despite being dominated by global businesses, UK equities appear to be penalised by their London listing and consequently offer more attractive returns than similar businesses listed elsewhere.”

The iShares FTSE 250 UCITS ETF (MIDD) tracks the FTSE 250 index and has produced double-digit returns this year so far. Bouncing back from the global period of volatility in Q4 2018, MIDD has seen its net asset value (NAV) climb 12.7% year-to-date.

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Even with the FTSE 250’s performance this year, McManus said Nutmeg is not alone in cutting exposure to domestic UK stocks as London listed FTSE 250 ETFs have seen significant outflows over the last three months.

The pound has fallen dramatically as a result of Brexit and investors are starting to bet against it now as long US dollar short sterling ETFs receive significant inflows.

Another area for concern in the UK is physical commercial property. Ryan Hughes, head of fund selection at AJ Bell, said the investment platform has removed any exposure to commercial property “partly as a result of worries over Brexit and the potential slowdown in the UK economy”.

This tactical position by AJ Bell has been ongoing for the last 18-months and is likely to continue as the deadline for a no-deal Brexit approaches.

Should Brexit create any significant disruption, depending on the asset class and opportunities, Hughes said the company will likely use an active approach over passive however has “no pre-conceived view on this and will assess each case on its own merits”.

It appears investors have not made any major preparations for this side of the Brexit deadline despite reacting to domestic UK equities performances which have likely been caused by the fear of a no-deal Brexit over anything else. Once the separation has been completed, if at all, then investors will make significant changes to their portfolios.

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