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PortfolioMetrix: the funds we back to negotiate Brexit

PortfolioMetrix: the funds we back to negotiate Brexit

Brexit uncertainty dominated the headlines in 2018, but Nic Spicer, UK head of research and a portfolio manager at PortfolioMetrix, believes it is a risk that can be managed, perhaps more easily than other changes facing markets.

‘Brexit is easier to diversify against because you can get exposure to international equities, which should do very well, at least in sterling terms, in the case of a difficult Brexit,’ he says.

Other uncertainties, such as US and China trade disputes, natural disasters in Japan or a slowdown in the US economy, are more difficult to insure against, Spicer says. This is why his response, in PortfolioMetrix’s Select range of model portfolios, is to always diversify but overweight areas where uncertainty is already priced in.

Select 5 is a medium to higher-risk model portfolio, aiming to deliver inflation measured by the consumer prices index (CPI) +4% over a six-year rolling period. It holds 23 funds and is 61% equities, and, as with the whole Select range, costs 0.35% plus VAT. There are also underlying fund charges that vary as portfolio holdings change.

Most of its funds are active, but Spicer says passive funds are used in asset classes where the team does not have sufficient conviction an active fund could add value to what a passive fund is actually charging.

Saying that, at the start of last year, Spicer sold out of a passive fund in the Select 5 portfolio. He sold out of a Vanguard fund to add the Brown Advisory Mid-Cap Growth fund, managed by Christopher Berrier and George Sakellaris.

‘It is a new entrant into the UK market but it is being run in the US with exactly the same strategy,’ says Spicer. ‘So we can get a good idea of the team’s track record and can get all the quantitative data but we can get better fee deals because it’s a new fund.’

The Brown Mid-Cap Growth fund ranked 9/63 in the US Small & Medium Companies sector over the year since its launch in the UK, returning 15.6%, compared with the average manager’s 8.3%.

In its US strategy, the Brown Mid-Cap Growth fund was slightly overweight healthcare, at 15.6% compared with the Russell Midcap Growth Index’s 14.3%, which served it well last quarter as the sector outperformed.

However, this was offset by underperformance in technology, despite the fund’s -7.4% underweight of the sector compared with the index.

Big freeze

Spicer says the Brown fund has been a good call because its performance is not dependent on what happens during the Brexit process.

‘A lot of funds that have done poorly this year or had a tough time of it had a lot of exposure to UK domestics, or really UK equities as a whole, and FTSE 250 companies, which had a tough time of it last year,’ says Spicer.

‘One that we really like the team of but had a difficult year is the Polar Capital UK Value Opportunities fund.’

The fund, managed by George Godber and Georgina Hamilton, was ranked 202/254 over one year, returning -7.3% compared with the average manager’s -4.1% in the UK All Companies sector.

‘That is a fund we don’t expect to do well if we do have a chaotic Brexit. But we need to design portfolios where we’re not taking a directional bet on which scenario we get so that’s effectively an insurance policy,’ Spicer explains.

‘[The fund] is in good companies, it should do well over the long term, but we expect that to be challenged if we have a tough Brexit scenario. On the other hand, if we get a deal and the fog of uncertainty clears, we expect that to be a key driver of portfolio returns.’

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