Investment Update – Preparing for Brexit

18th September 2019

With Brexit emotions running high it is at times like this that investors should remember the golden rules to better investment decision making:

  1. Do have a long-term investment plan. The VWM Thrive process is geared around focusing on your longer-term goals and not getting distracted by short term “noise”. A clear plan will help you keep a cool head.  To quote John Bogle, Founder of Vanguard Investments, “Time is your friend; impulse is your enemy”.
  2. Do rebalance the portfolio. We undertake regular rebalances of your portfolio; typically, every couple of months. This has the effect of adding to those areas of the market that are temporarily out of favour (buy low) and trimming those that have performed well (sell high).
  3. Don’t check your portfolio too frequently. Again, this comes down to focusing on the longer term. We are checking your portfolio regularly to make sure it is performing to its optimum potential and making any fine-tuning amendments that might be required.
  4. Don’t make emotional decisions. With Brexit looming this is perhaps more important than ever. The temptation is to overdo what might otherwise be a sensible strategy.
  5. Don’t trade. Make doing nothing the default position. Rather than focus on the short term, investors should look to the horizon. For a variety of reasons doing nothing is sometimes difficult but often it is the best choice.

It could just be the usual summer malaise, but markets appear to have paused for breath as the level of uncertainty has been rising. What is clear, however, is that the global economy is slowing down after a period of sustained growth. Economic growth has been dented by the US China trade war and closer to home by Brexit. The fixed interest markets are indicating that there may be a recession in one to two years and this prospect was enough to send markets into a tailspin in the final quarter of 2018. However, this indicator may not be working as well as it has done in the past due to the distortion caused by Quantitative Easing (QE). In our view, the global economy is slowing but, at this point, it is difficult to gauge its severity and there may be opportunities ahead to acquire assets cheaply.

Central banks have also seen the slowdown and are now trying to do everything they can to stave off recession. In particular, the decision of the US Federal Reserve in January to reverse its rising interest rate policy has prompted a rally in markets that has wiped out the Q4 2018 losses bringing markets back close to all-time highs in several cases. There are also indications that governments will spend more as it is currently very cheap for them to borrow to finance expenditure and this would provide a further boost to the economy. Our view is that markets can continue to make progress from here although the going may get tougher as markets continue to gyrate as both Brexit and the trade war swing from being on to being off on an almost daily basis.

Against this backdrop we have been gradually moving the portfolios more defensively by increasing the fixed interest component as we think this offers value as the economy slows. The Fixed Interest funds we have selected have performed particularly well in the recent past as have the overseas holdings. We have retained an overseas bias to the portfolios in the face of Brexit as, like many, we remain unsure of what will happen and when. Rather, we are ready to react when there is clarity. We have held some UK funds with a bias towards medium sized companies as we anticipate that these will perform relatively well once a clearer picture of Brexit emerges. It may come as a surprise to some but the FTSE100 index of leading shares is up nearly 13% since the turn of the year. However, global stocks are up over 21% so Brexit does appear to be acting as a drag but may provide an opportunity too.

As ever, we continue to look closely at the liquidity in the portfolios which is a subject that has been brought home by the recent suspension of the high-profile Woodford fund; which, unlike many of our peers, we completely avoided. Liquidity is a very important feature as it means you have full access to your funds and it gives VWM the flexibility to rapidly alter portfolios if required. Accordingly, we have been reducing our exposure to property in those portfolios that hold it and focusing on low risk property funds to help ensure liquidity is not an issue.