THE PRUDENT INVESTOR: Don't get caught on the hop by another Brexit currency shock

Most of us only worry about the strength of sterling when we go on holiday. But in the coming months it could have a dramatic effect on our investments.

Sterling crashed after the Brexit vote on June 23, 2016, giving an unexpected turbo charge to some large companies such as Shell and BP, which count their profits in dollars.

Similarly investors in overseas shares and funds, particularly in the U.S. have fared well.

Sterling crashed after the Brexit vote on June 23, 2016, giving an unexpected turbo charge to some large companies such as Shell and BP, which count their profits in dollars

But smaller UK firms earning their money in pounds fared poorly, as have UK-focused banks like Lloyds.

Since the day of the Brexit vote a £1,000 investment in HSBC’s FTSE 100 index has grown to £1,244 with income reinvested, according to analysts Morningstar.

The same amount in its FTSE 250 fund following medium sized companies would have grown to £1,192.



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However, tracking the U.S. S&P500 would have returned £1,541 and picking the managed fund Baillie Gifford American would have given £2,076. 

This has led investors to dump UK-focused funds and head for better hunting grounds overseas.

Statistics published by the Investment Association show that UK All Companies was the most unpopular sector last year with more investors selling than buying every single month.

Global funds was the best-selling sector. Now several financial experts are raising warning flags.

Jason Hollands, managing director of Bestinvest, tells me we all need to take a hard look at our portfolios to make sure we are not over-exposing our savings to any sudden Brexit-inspired currency movements. 

Mr Hollands says: ‘Currency has been a huge factor in returns since the referendum. The sharp fall in sterling flattered the earnings of some companies and boosted overseas holdings. People with diversified portfolios shared in those gains.’

Big gains in global and U.S. funds or in big FTSE stocks with overseas earnings set against poor returns for those based purely in the UK could mean portfolios have a very different look to 33 months ago.

‘Ask yourself where your liabilities are. Your mortgage is in sterling, you use sterling, so you should have a good proportion of your assets in sterling,’ Mr Hollands says. 

This isn’t a klaxon call to go out and sell everything in dollars. It’s more a suggestion that you reassess and rebalance — perhaps take some profits or buy something that has not done so well but could bounce back — depending on your view of Brexit.

Mr Hollands says as a very rough guideline UK investors might want around 40 per cent of their money in UK companies.

It’s advice I’ve taken and I have done a thorough analysis of where my money is held.

There are other factors at play here. The Federal Reserve — the U.S. equivalent of the Bank of England — has stepped back from a policy of raising interest rates so the dollar may weaken.

Darius McDermott, managing director of Chelsea Financial Services, says: ‘I cannot remember a time when currency has been so important when it comes to our investments.

‘Usually we say not to worry too much, as currency moves are usually small, hard to second guess and iron themselves out over time.

‘However, since the EU referendum, currency has played a huge part in returns for UK investors.

‘If and when we do get some good news we expect the pound to strengthen reasonably significantly at which point all overseas funds and companies with overseas earnings will feel the impact. Returns will be negatively affected by the currency move.

‘That’s not to say good funds can’t still produce positive returns, it’s just that they will be lower due to the rise in the pound.’

He has been slowly increasing the weighting to UK funds with a mid and small-cap bias in managed funds he runs for a few months to address the issue of balance. 

UK equity income funds covering various sizes of companies — so-called multi-cap — yield about 4.5 per cent. ‘Even if the stock market goes nowhere, there is still income to be earned,’ he says.

His choices include Man GLG UK Income and Montanaro UK Income which both have a bias towards smaller and medium-sized companies. 

In addition JOHCM UK Dynamic and Jupiter UK Special Situations are multi-cap and look for value.

Ben Yearsley, director of Shore Financial Planning UK, says: ‘Domestic stocks are among the cheapest in the world, partly down to Brexit.

‘It makes sense buying into some of these for the long term, regardless of the Brexit outcome as you can buy stocks that look cheap in historic terms often with incomes of around 5 per cent.’

If you are expecting a soft Brexit, Mr Yearsley likes JO Hambro UK Dynamic — though he warns this holds a reasonable number of companies which earn profits in dollars. 

Other funds which may tick the box include Merian UK Smaller Companies and Aberdeen Standard UK Equity Income Unconstrained.

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