Keeping track of the cumulative effect of Brexit so far is not easy. To help you make sense of it all we’ve pulled together a summary of the key impacts on performance and how the portfolios are positioned now.
Performance of the portfolios to the end of June relative to the peer group was strong however the impact of the vote led to some short term underperformance against the strategic benchmarks.
While asset allocation and stock selection were both negatively impacted by market reaction to the vote most of the shortfall was due to large valuation timing differences which reversed in July. The three key detractors from performance were:
The FTSE 350 Index rose by 2% between noon and the close on the 30th of June after a speech by the Bank of England Governor, Mark Carney. The RLP funds are valued at midday compared to an end of day valuation point for the benchmarks which meant this rise wasn’t captured in the quarter end figures. This effect subsequently reversed, generating a positive contribution to relative performance figures over periods to the end of July.
Within the GPs the RLP equity and bonds funds underperformed due to a combination of above benchmark exposure to UK mid cap stocks, short duration positioning within bond funds reflecting RLAM’s long held view that bond yields are too low, and a preference for less liquid names within fixed income as uncertainty after the vote led to a sudden drop in interest rate expectations and a widening in spreads. Since the vote we have benefited from a considerable rebound in UK midcap. Credit has also rebounded strongly, we think the default risk is overstated and expect credit to outperform gilts going forward.
We continue to expect a modest upturn in global economic growth with limited impact from the Brexit vote. The impact on the UK economy is more significant and we see a technical recession, the BOE has already eased policy and we expect a further base rate reduction. Inflation should increase from the current low levels, as the impact of a lower oil price fades. Within the Governed Range, we are positioned as follows:
While the full implications of Brexit are not yet clear, market shifts provide opportunities for us to adjust positioning. Diversification will be important during bouts of volatility and the broad spread of exposures provided by the new Governed Portfolio benchmarks should offer some stability in times of turbulence.