London (Bloomberg): Since the UK decided more than three years ago to leave the European Union, the nation’s savviest investors have succeeded by putting their money where Brexit matters least.
Uncertainty about the date of Britain’s departure and the terms of the divorce has meant purging the UK from their holdings or limiting them to investments traditionally impervious to man-made and natural disasters. Over 38 months, British sterling depreciated 16 per cent, the worst shrinkage for any similar period in eight years.
The pound remains the poorest performer in the actively-traded foreign exchange market and inferior to the No. 3 euro. Europe’s strongest major economy in the 21st century became a shadow of its former self, reversing two decades preceding the June 23, 2016, referendum when the UK outperformed the EU in growth and investment.
London’s stock and bond markets similarly languished as laggards to world benchmarks, after beating them consistently in the 20 years prior to the decision to leave the EU.
“If I give myself some credit, I would say that we acted reasonably fast liquidating UK shares” in 2016, said Ben Rogoff, whose Polar Capital Technology Trust PLC has been the most consistent winner out of the 212 British global funds with at least £1 billion this year and during the past three years. His team’s 114 per cent total return (income plus appreciation) was 22 percentage points better than the Dow Jones World Technology Index, mostly because 68 per cent of the fund is invested in the US, two-thirds of that in California companies.
“It’s all about the internet and where do you get exposed to the internet? The US and China,” Rogoff said. While Rogoff reduced his holdings of three California tech powers during the past year — Apple Inc., Facebook and Advanced Micro Devices — he acquired more shares in Tencent Holdings, Alibaba Group Holding Ltd, Samsung Electronics Co. and Yahoo Japan Corp.
First out of the door
He became lead manager of the trust in 2006, “and at that time, the UK weighting might have been 5-10 per cent, so if you had already been backing away to the door, it’s a lot easier to escape than if you built a career around being an expert in UK equities”. Since the Brexit referendum, he said, “There’s just been a complete buyers’ strike of UK equities.”
Proof of such disdain comes with the crisis this year at the LF Woodford Equity Income Fund, Britain’s most-prized investment when it was launched by star money manager Neil Woodford in 2014. The celebrated stock picker became even more prominent with his contrarian bullish stance on Brexit.
The fund plummeted 31 per cent during the past two years by holding a combination of large and small UK companies and has frozen redemptions indefinitely.
“It’s symptomatic of a broader problem,” Bank of England Governor Mark Carney said. “Our sense is that the financial-stability risks are increasing.”
A consumer staples bet pays off
One UK investor who’s successfully resisted the trend away from domestic stocks is Nick Train, who manages Finsbury Growth & Income Trust. It returned 61 per cent the past three years — more than twice the FTSE All-Share Index benchmark — as the most consistent one- and three-year performer among the 129 UK-based funds investing mostly in domestic stocks or bonds.
Unlike Woodford, who doubled down on the British economy writ large, Train dramatically increased his holdings in consumer staples. These are the companies that make such essentials as food, beverages and household goods and can resist business cycles because their products always are in demand.
Train increased the consumer staples weighting relative to the benchmark to 27 per cent from 23 per cent in 2015 and he enhanced his holdings of Mondelez International Inc., which manufactures and markets packaged food products, and Diageo.
That’s likely to be a safe bet as no one is counting on the British economy rebounding significantly from near the bottom of the EU while the uncertainty created by Brexit persists. “If you take a long view, then this may well be a great time to be investing in UK equity,” said Rogoff. “Thankfully, I don’t have to make that binary call because there are very few UK companies I’m frankly interested in.”