Brexit: How to Manage the Market in Times of Unrest

­­The vote to remain or to leave the ­European Union takes place on Thursday 23^rd June 2016. Arguably, it is one of the most important decisions voters will have taken in this new millennium.

Below, our Chief Investment Officer, Colin Beveridge, explains the recent shifts in the market in the run up to the vote and what we can expect from the markets going forward.

What we know is that the result of the vote will be officially announced at midday Friday 24^th June. It is assumed market participants will know the outcome at around 8am on the morning of the 24th, or even sooner, and thus before markets open. On the day we will send out further communication giving up to date reactions from each of our managers as events unfold.

In the last few days the market mood has shifted. Uncertainty is starting to build that a vote to leave is gaining momentum. Hitherto the chances of this were considered slim. As a consequence market prices of riskier assets like equities have fallen and less risky assets like sovereign bonds have risen. In other words there is a classic flight to safety underway. In a multi-asset environment this means that investors, particularly in the lower risk categories, are receiving a measure of protection against this turbulence, through holding sovereign bond and via cash positions. In addition exposure to non-sterling investments means that the recent falls in the value of the pound is providing a cushion effect against falling prices in overseas markets. In the tables below we show month-to-date price movement in equity markets versus the price movements in our own funds that are mapped to the lower risk categories from Defensive through to Balanced.

Returns Month to Date 13 June 2016

True Potential Wealth Strategy Funds

Fund	MTD
True Potential SEI Defensive	0.60%
True Potential 7IM Defensive	0.88%
True Potential SEI Cautious	0.43%
True Potential Close Cautious	-0.61%
True Potential Close Cautious Income	0.20%
True Potential Schroders Cautious	-0.15%
True Potential Schroders Cautious Income	0.29%
True Potential 7IM Cautious/td>	0.39%
True Potential Allianz Cautious	1.38%
True Potential SEI Balanced	-0.20%
True Potential Close Balanced	-0.94%
True Potential Schroders Balanced	-0.33%
True Potential 7IM Balanced	0.39%
True Potential Allianz Balanced	1.37%

Equity Markets

Market	MTD
Global Equities	-1.73%
UK Equities	-2.98%
US Equities	-0.85%
European ex UK Equities	-5.60%
North American Equities	-0.68%
Japanese Equities	-6.90%
Asia Pacific x Japan Equities	-0.19%
Emerging Market Equities	0.25%

With Brexit coming into sharper focus it is easy to conclude that the recent negative price action in markets is wholly a reflection of growing concern about the upcoming vote. While there is strong evidence that the volatility in currency markets, particularly in the pound, is spreading out into other asset markets and industry sectors more generally, recent statistical data on growth and jobs in the US has weakened. This is also weighing on investor sentiment thus adding to the souring of sentiment in the last few days. It also means that the capacity for asset prices to eventually rebound is growing because when uncertainty recedes it is replaced with an appetite for risk.

What can we do to help put current events, specifically around Brexit, into a different context for you? Presently, uncertainty is fuelling fear but the opposite side of the coin is opportunity. In our recent manager discussions we have been focusing on their actions as well as their thoughts about the future.

What is clear is that portfolio activity ahead of Brexit in our funds has been relatively muted. This is partly because the diversity of assets is providing a form of insurance against the instability we are seeing in markets right now. It is also true that our managers have tended to the view that a vote to stay is the most likely outcome, while acknowledging that portfolio strategy will be reappraised should the situation change. Their task, and it isn’t an easy one, is to remain focused on the long term interests of clients and to not get unduly side-tracked by short term volatility. They do this best by capitalising on wealth generating opportunities when they arise.

What do we mean by taking advantage of opportunities? By way of example in our lower risk funds we find that portfolios categorised as Defensive, Cautious and Balanced, where managers are actively mitigating risk, cash levels are fairly high. To give you a better impression of the levels our Cautious Dynamic Portfolio has around 24% in cash, whilst the Cautious Managed Portfolio has around 13% in cash. This shows managers have firepower at their disposal and at the same time they have a strong cash buffer acting against market volatility. Moreover, as cash flows into funds increase, the opportunity set for the managers grow.

Lower risk, non-income, models	Cash level
Cautious Dynamic Managed	23.9%
Balanced Dynamic Managed	8.0%
Defensive Managed	32.10%
Cautious Managed	12.80%
Balanced Managed	8.70%

Our message is a fairly simple one, invest long term and remember that as cash inflows increase, managers have but one goal –to aim for long term wealth creation. Yes, falling prices can be off-putting but this means putting off opportunity. Our model portfolios blend together the different manager styles and give maximum diversification across a range of funds at a time when attitudes toward Brexit are wide ranging and changing all the time.

In conclusion, while True Potential Investments’ managers have different investing styles and different approaches to the way they construct portfolios, we also know that in one way or another, they are poised to take advantage of opportunities when they arise. The optionality at their disposal is a reflection of the wide range of investing opportunities available to them and the flexibility to act when necessary. We will endeavour to keep you updated as events unfold.

 

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