I don’t know about you but the the inevitable barrage of Brexit opinion, speculation and political opportunism we’ll witness over the next nine weeks possibly frightens me more than the issue itself!
I’ve been asked by a number of clients how market reactions to Brexit might affect their investments and pension funds.
The debate, as we know, is very complex and highly emotive, and you’re not alone if you’re still left scratching your head after reading the ‘Latest Guide to Brexit’. Conventional wisdom suggests that when the chips are down, our cautious electorate will vote to stay in the EU (“if it ain’t too broke, why fix it?”) but you never can tell.
Beyond this, the long-term economic and market impact of staying or leaving – despite the statistics being trotted out by all sides – is very unpredictable.
This lack of certainty is the very thing that causes people to worry and markets to wobble. Those who know me well won’t be expecting me to forecast how the referendum result could affect the UK market, but hopefully I can offer some practical ground level guidance about managing and preparing your investments.
Whether we vote to stay in, leave or sleep in different bedrooms, if the lasting economic consequences for the UK should happen to be negative, you shouldn’t be overly affected provided your money is invested in the right way.
Your pensions, ISAs and managed investment funds are probably invested in mainstream asset classes like shares, government and corporate bonds, and perhaps even commercial property. These should hopefully be balanced in a way that meets your appetite for risk and long-term growth or income objectives.
Most investors are familiar with this concept of diversification. However, there’s another aspect of ‘eggs in baskets’ that investors can sometimes miss: geographical diversification.
The traditional thinking used to be that we should invest closer to home because we supposedly knew more about the assets we were investing in and trading was easier. This no longer applies in the modern world; technology and the globalisation of financial services means information and money moves far more freely and investors can access returns from all corners of the world.
If it were to go economically belly up for the UK and most of your portfolio is sat in UK shares, bonds and property, then you should rightly be concerned. If, however, you’ve had the foresight or advice to spread your portfolio further afield (US, Europe, Asia and Emerging Markets), then events closer to home should have significantly less impact on the performance of your investments.
Which investment funds could be over-exposed to the UK market?
If the fund name has ‘UK’ in its title, consider this a big clue! If this is one part of a portfolio of investment funds, then you can sleep a bit easier.
Where you will need to be much more vigilant is if you’re invested in ISA/pension funds and discretionary/bank-managed portfolios that date back 7-10 years or more. It’s definitely worth looking at these more closely, as many were (and still are) heavily biased towards the UK.
How much UK share exposure should you have?
In the investment management world, there’s no given consensus on how much you should invest in any given country…the most important thing is to avoid being invested in too few.
A contemporary approach is to weight the portfolio by global market capitalisation. For example, the UK makes up about 7% of the world’s total equity investment – this is about the same as Germany and France combined but paltry compared to the USA (approx. 50%). This is a reasonable starting point for assessing where you are and how you might want to structure your portfolio geographically.
As a general rule of thumb, if your portfolio begins to exceed 20% UK share exposure, it would be advisable to take some action.
In anticipation of the Brexit circus coming to town, hopefully this has given you some context, food for thought and even prompted some action where necessary. Please feel free to get in touch if you have any questions or need further help.
Thanks for reading.