“The likes of the Lindsell Train UK fund could underperform peers if Brexit is resolved, as valuations of some of the investments are not cheap and the fund would get as much of a kick from a resolution as some peers.”
Juliet Schooling Latter, research director at Chelsea Financial Services, explains that if there is a deal when the UK leaves the EU, the pound is likely to rally and this would hit the larger dollar earners hardest.
She continues: “If we had a no deal, then those funds holding mid and small caps and domestically-focused companies, like the banks, would have been hit hardest.
“In the first scenario, funds like Evenlode Income and Lindsell Train UK Equity [would be hit].
“In the second scenario, funds like Liontrust UK Mid Cap (newly-named Neptune fund), Jupiter UK Growth, Investec UK Special Situations. But it may only be short term, before individual fundamentals of a company come back into play.”
There are plenty of investors who do not hold any actively managed funds, and have kept costs to a minimum by investing in the stock markets via passively managed products.
Tineke Frikkee, head of UK equity research at Waverton Investment Management, says: “If one were to invest through passive funds/trackers, a favourable Brexit resolution and strengthening pound should lead to the FTSE 250 and small companies outperforming the FTSE 100, and vice versa.”
She adds that for active funds, the outcome is less clear.
“Large-cap focused funds may be more domestically tilted than expected and mid/small-cap focused funds may be more overseas tilted than expected,” Ms Frikkee notes.
Currency moves
The fortunes of FTSE 100 and FTSE 250 companies are inextricably linked to the strength of the UK’s currency.
As Fidelity International portfolio manager Ayesha Akbar observes, sterling and the FTSE 250 recently outperformed the FTSE 100 following more positive news flow surrounding a potential deal.
“This is broadly in line with what we would expect, given the FTSE 100 benefits from sterling weakness, and the FTSE 250 tends to benefit from stronger sterling,” Ms Akbar adds.
David Stevenson, manager of the TB Amati UK Smaller Companies fund, acknowledges that the impact Brexit could have on an individual company will depend on a variety of factors, and will not simply come down to whether it is an exporter or international earner that will benefit from sterling weakness.
“Services-based companies will also be affected differently to manufacturers.
“Some of these myriad complexities can affect both large and small companies, and both UK-focused and overseas dependent earnings,” he explains. “Nonetheless, the stock market has voted with its feet since the 2016 referendum result, with UK domestic players significantly underperforming their overseas exposed counterparts.”
