The United Kingdom, according to S&P, faces at least three and a half years of ‘slowed economic growth’ when they announced on Monday night that Britain’s credit rating had been slashed by two notches to AA negative. This puts our sovereign bonds on the same credit rating level as those issued by Estonia and the Czech Repubic (oh, the irony!).
Dominic Rossi, global chief investment officer at Fidelity Investments, said on Monday morning that the UK was likely to be in recession before Christmas, the Leave campaign is absent without ‘leave’ (sorry) and the stock market, currency and political system have been in a state of near total chaos since Friday last week.
In this environment funds which have little or no exposure to the UK are obviously an attractive option, but the implications of Brexit have tremendous consequences for many countries around the world. Europe, obviously, stands to suffer as a result of the uncertainty caused by imminent departure – we are, for now, the second largest economy in the bloc and many economists believe that our departure will result in the total collapse of EU itself. Italy – with a general election next year – could follow, and demands for a referendum in France and the Netherlands continue.
China, India and the emerging Asian economies are heavily dependent on demand from Western economies – so they are vulnerable to Europe’s convulsions. Japan might seem like an odd victim, but the yen must fall if the Japanese economy is to prosper, and if sterling and the Euro continue to collapse versus the dollar, the yen will strengthen in relative terms.
All in all, its a right muddle. Amid the carnage, the United States is likely to see inflows as the world’s ‘safe haven’ destination. The US economy is strong, and the dollar – in the face of declines everywhere else – is likely to soar, lifting dollar assets as it does so. Bonds, too are likely to see strong inflows, and gold (priced in dollars) – although already relatively expensive – is unlikely to see much weakness in this environment. Inflation, likely to hit the UK which depends on imports that become more expensive with each slide for sterling, means index linked bonds are also likely to be in demand.
We highlight four investment trusts which we have profiled in recent months which, for one reason or another, are have limited exposure to the UK’s self-induced catastrophe.
Mid Wynd Investment Trust is a global portfolio of around 55-70 holdings with heavy exposure to US equities and limited UK exposure which aims to achieve income and capital growth through investing in established companies with solid and predictable cashflows. The fund’s managers, Simon Edelsten, Alex Illingworth and Rosana Burcheri had a hefty cash weighting going into the crisis, illustrative of their objective which explicitly aims to protect capital during periods when markets fall. The trust also features a zero discount policy, which helps to limit discount volatility.
RIT Capital Investment Trust is a highly individual trust which has used many of the benefits of the closed-end structure to deliver long term results with a lower volatility than the equity market. The trust aims to offer a global exposure to diversified asset classes and themes. It differentiates itself by being both entirely benchmark agnostic, investing in a wide variety of asset classes, and regions, and also not aiming to be invested in equities all of the time. It is also heavily exposed to the US, where more than half of the portfolio is invested.
The Biotech Growth Trust invests in companies which use biotechnology to produce drugs, treatments, therapeutics and equipment. It is a focused portfolio of around 40 stocks, the vast majority of which are based in the United States, with a high concentration in its top ten holdings which make up more than half of the portfolio’s total assets. The trusts healthcare focus places it in a position of relative stability in terms of demand for the things it invests in, however this is a single industry fund – so volatility
Ruffer Investment Company* is an unusual investment trust focused squarely on absolute returns. It invests primarily in ‘long only’ assets – equities and bonds – but also uses currencies and derivatives as part of its investment process. The trust distinguished itself after the managers correctly ‘called’ the credit crunch, and it was one of few vehicles to deliver strong positive returns in 2008. The trust is heavily invested in US treasuries and index linked bonds, gold and cash, and has lost money only twice in any of the last ten calendar years, and then in each case less than 6%.
*Please note, to avoid any doubt about conflicts of interest, the author of this article owns shares in Ruffer Investment Company. Ruffer is not a client of Investment Trust Intelligence, but on the basis of this conflict of interest, this could be considered non-independent research.
