Plotting a path through Brexit uncertainty

Anthony Cross, co-manager of Elite Rated Liontrust Special Situations and Liontrust UK Smaller companies funds, adheres to an investment process – the Economic Advantage – that does not involve the prediction of macroeconomic or political outcomes. He and his co-manager believe it is better to concentrate on the selection of companies capable of outperforming throughout an economic cycle.

So, in the run up to the EU referendum, they made no significant changes to their portfolios, nor have they done so since the Leave vote was announced.

Here, Anthony discusses the impact of Brexit on his funds’ holdings.

“In our view, the secret to successful long-term investing is to identify companies with a durable competitive advantage that allows them to defy industry competition and sustain high profit levels,” says Anthony. “We only invest in UK companies with distinctive, intangible strengths that competitors struggle to reproduce.

“This is not to suggest that recent events have not had an impact on the share prices of the companies we hold. Such exogenous shocks are unavoidable and we have built an investment process that we believe provides the best framework to cope with them. Brexit now joins factors such as the slowdown in the Chinese economy and the uncertain path of global monetary policy as significant macroeconomic influences on the corporate sector.

“Speculating on precise short-term implications is not part of our investment process and it is difficult to add meaningfully to the burgeoning body of market and political commentaries issued in recent weeks.

“What we do know is that we are in a period of significant uncertainty, and it seems logical that this must have a knock-on impact on domestic consumer confidence and business investment within the UK. We have also seen a drop in the value of the pound which, if sustained, will have an impact on many companies. Weaker sterling is a two edged sword. It is a negative for companies that need to import goods or services but a benefit for those who export.

“We expect that the Economic Advantage characteristics we seek out―particularly the high contracted recurring income that many holdings possess―will provide a degree of insulation from an environment of short-term economic uncertainty and should allow the companies we are invested in to show some resilience.

“Taking a moment to briefly look at our portfolios’ composition, we have a good number of strong international businesses in healthcare, global consumer goods and services. In addition, we own exporting businesses in service areas and engineering that should benefit from sterling weakness.

“Our focus on the possession of Economic Advantage assets has also steered us clear of retail banks and classic UK consumer cyclical areas such as retailers, travel companies or housebuilders. We have therefore been protected from some of the share price falls that reflect investors’ anticipation of a sharp UK economic slowdown. But any slowdown would have an impact on business and government investment―affecting companies we own such as UK-focussed service and software companies―so we are not by any means immune from the fallout.

“We believe that an investment process favouring high quality, dependable businesses should prove valuable when markets are in a state of flux. Our experience of past bouts of uncertainty and risk aversion is that investors seek out high quality businesses of the type we are invested in. If Brexit concerns intensify, we would therefore expect our funds to display lower volatility than the market.”

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