Fund selectors have shrugged off any short-term market fears following this week’s triggering of Article 50, but have warned of higher volatility over the coming months.
They have pointed to a number of both specialist and wider funds geared up to deliver returns amid the post Article 50 uncertainty.
On 29 March, Prime Minister Theresa May triggered Article 50 of the Lisbon Treaty, which will start a two-year negotiation process for the divorce of Britain from the EU.
Following the Brexit vote on 24 June, May reiterated in a statement to MPs yesterday that the UK is leaving the EU and there is “no turning back” on the decision.
But while the deal unfolds in the coming months, investors should not expect any big shocks.
AJ Bell investment director Russ Mould says, without second guessing the negotiations that the UK will have with the EU, investors should keep investing in funds that are prepared for higher volatility.
He says: “No-one knows how the Brexit negotiations are going to go and what they will ultimately mean, not even the politicians and diplomats involved, so trying to second guess the end result is largely pointless.
“As such, it looks best to stick to those funds or investment trusts which are prepared for a potential increase in volatility, build in a margin of safety through a value bias or have a well-defined research process which focuses on what are the ultimate arbiters of returns from any security; corporate cash flow and the price you pay to access it.”
Since the EU referendum the FTSE All Share has returned 17.8 per cent, notes Hargreaves Lansdown senior analyst Laith Khalaf.
Meanwhile, blue chips within the FTSE 100 have risen 19.1 per cent, ahead of the more domestically focused FTSE 250 companies which have lagged behind, despite posting an 11.3 per cent return.
Henderson UK Absolute Return
Mould says one of the “very best” funds which would potentially benefit from volatile stocks, especially in the small cap space, is the Henderson UK Absolute Return fund.
He says: “Over the past 12 months, the best performer in the FTSE 350 is up by more than 500 per cent and the worst down by 47 per cent, and if volatility does increase one option to consider is a long/short UK equity fund which can profit from winners and losers in this environment.
“Ben Wallace and Luke Newman, the managers of the Henderson UK Absolute Return fund, have proved they are highly capable of navigating volatile markets and often come into their own when markets become disrupted.”
The fund has an ongoing charge of 1.06 per cent.
Khalaf notes small caps have performed better than both the FTSE 250 and the FTSE 100 since the UK voted in the referendum last June, returning 19.6 per cent, having been sold off to a much lesser extent than midcaps in the immediate aftermath of the referendum.
Small caps then performed better than large caps towards the second half of 2016.
Standard Life Investments UK Equity Income
Fundcalibre managing director Darius McDermott says the Standard Life Investments UK Equity Income Unconstrained fund or the Marlborough Micro Cap Growth fund are good ways to play domestic UK mid and small caps.
He says: “There is a lot of good value in domestic UK mid and small caps. Companies have continued to trade well but their share prices look like they have a profits warning. Many look like attractive takeover targets to an overseas investor.”
McDermott mentions Hugh Yarrow’s £1.2bn Evenlode Income fund as a fund to continue profiting from international stocks listed in the UK.
He says: “Quality economically resilient businesses which get most of their earnings outside the UK should protect especially if the pound falls.”
Temple Bar Investment Trust
The trust is set to continue perform in a low interest rates environment, where rates are set to remain at record lows during the two-year negotiation process, according to AJ Bell.
Mould says seekers of UK equity income could look toward Temple Bar Investment Trust, managed by Alastair Mundy of Investec, who has a clear value bias.
“The low OCF of just 0.49 per cent is an additional attraction”, says Mould.
Liontrust Special Situations
Mould says the £2.5bn Liontrust Special Situations will “block out” all of the short-term noise that events such as Brexit can bring.
Mould says: “Julian Fosh, Anthony Cross and Liontrust’s Economic Advantage team screen companies to see whether they have a strong, long-term competitive position or not, assessing their intellectual property, route to market and ability to generate repeat business as key tests. A scoring system provides an initial short-list which is then whittled down further to provide a portfolio that currently contains around 50 stocks.”
Woodford Patient Capital Investment Trust
Woodford Patient Capital is a specialist small-cap fund and has high weighting to early-stage healthcare firms.
Mould says: “Anyone looking to buy into the trust needs to think long term but manager Neil Woodford is unlikely to be deflected from his mandate by any Brexit-related ructions, while one bonus for shareholders is the absence of a management fee until the trust delivers 10 per cent per annum.”