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Active insulation

06 July 2016

Chris Reid of Majedie Asset Management believes global exposure and prudent active management should help investors cope with an EU exit.

Stock markets have been volatile since the UK voted to leave the EU, not least in London, and sterling has remained very weak against the dollar.

In such circumstances, it would be understandable if investors worried about the value of their holdings and their income stream, especially if they believe investment and economic growth are under threat.

Chris Reid of Majedie Asset Management believes that the dividend stream for his UK Income fund is secure, however, not least because the businesses he has invested in are not simply focused on the UK.

“We estimate around 40% of the fund’s net asset value is invested in ‘dollar profits’,” said Reid, referring to where the companies derive their revenue.

Reid says one of the best examples is Tate & Lyle, the century-old British sugar importer and agribusiness which accounts for 4.3% of his portfolio.

“Around 90% of its profits are in US dollars,” says Reid. “This is likely – but not guaranteed – to cushion the company’s performance in the short term.” 

Banking growth

Global exposure is not the only way in which Reid believes his fund has some protection from the immediate domestic effects of Britain’s vote to leave the EU. He had also made alterations to the portfolio ahead of the vote itself, especially within his substantial allocation to financial companies.

“Financials continue to represent over 40% of the fund, although the complexion has changed, as we started to reposition the portfolio in advance of the referendum in order partly to mitigate the risk of Brexit,” said Reid. “The main stocks that have had big reprices post-Brexit are obviously banks and life insurers.”

Banks now account for 2% of the fund, whereas they accounted for more than 12% earlier in the year. Aside from sentiment, the main problem for financials post-Brexit is a likely lower for longer interest rate environment which could mean lower profitability and thus dividend distributions from banks in particular. Prior to the vote, Reid sold off Intesa Sanpaolo (on fears over Italy being vulnerable to eurozone woes) and around 50% of his holding in Lloyds, exiting the balance following the referendum vote and once it became clear that further interest rate cuts were likely to be on the Bank of England’s agenda.

At 18% of the fund holdings, life insurers account for a much larger proportion of Reid’s investments than banks. The fund’s largest UK-based holdings are Aviva (5.5%) and Legal & General (6.4%). Reid says Aviva has already forecast that a UK exit would have no operational impact on the business and has contingencies in place. He is confident about Legal & General’s outlook too.

“Legal & General have also confirmed business-as-usual and in fact have over £2 billion of immediate cash liquidity available now to themselves take advantage of market dislocations,” says Reid. “We think the UK life insurers have balance sheets that are around four times stronger than in 2008 and have much more diversified sources of cashflow, regardless of Brexit.”

Gear shift

The post-referendum sale of financial stocks has been a broad-brush trend, often taking with it companies that may merit greater confidence. Among those companies are car insurers, which account for 10% of Reid’s portfolio.

“Although these stocks are suffering in the initial market sell-off, it is not clear that Brexit will drive people to avoid buying car insurance,” says Reid.

Reid holds Admiral, Direct Line and Saga. In each case, he points out that most of their financial investments are short-term, bond-related (i.e. conservative), and reasonably low-risk in nature. (The exception to the latter are their PPI claims, but these are relatively marginal in terms of scale.)

“While they may report some investment losses, the balance sheets of these companies are likely to be resilient,” says Reid. “Admiral and Direct Line are net cash, while Saga is net debt but has converted its insurance business to a capital-light model.”

The opinions expressed are those of Chris Reid and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

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