The start of the year was marred by concerns over the Chinese economy, anxiety over the Federal Reserve’s move to hike interest rates in the US, and in the UK, uncertainty gathered in the run up to the EU referendum.

Traditionally, in times of stock market volatility, investors move towards safe haven asset classes, such as cash, gilts (government bonds) and gold.

As gilt yields turned negative for the first time last month, and with demand for gold soaring, pushing up their price, many investors and investment managers turned their attention to cash in anticipation of a Brexit vote.

Now post-Brexit, portfolios have been left in an overweight cash position as investors and managers alike analyse the next buying opportunities.

So what looks good and how should you deploy your increased cash holdings back into the markets?

How the experts are re-investing overweight cash holdings

For David Coombs, head of multi-asset investments at Rathbone Unit Trust Management, while his investment strategy focuses on risk and reward in equal measure, he decided early on that he would need to mitigate the risk of a Brexit vote. As a result he raised cash and reduced sterling assets.

Knowing commercial property funds would be hit hard in the event of a Brexit vote, Coombs entered into a big sell off period in March last year, just as well as a number of firms suspended trading in their commercial property funds after an increase in redemption requests amid the Brexit fallout.

After initially looking to increase his exposure to corporate bonds, he ended up reducing it based on remaining nervousness in the direction of both bonds and gilts.

“If sterling continues to fall we will get inflation and if bond yields go up, there’s potential to lose a lot of money. If there’s no liquidity in corporate funds, they’ll be in the same position as property funds,” he says.

As a result in the immediate aftermath of Brexit Coombs was sitting on a much higher than usual 25% cash weighting. Areas he is looking to deploy this cash include the hard hit domestic stocks, such as ITV and Next, mid cap equities in the FTSE 250, and Real Estate Investment Trusts (REITs).

“We went into Brexit with low exposure to the UK and now we’re putting it back in,” he says.

With REITs being marked down at the start of the year, Coombs says they were due a “healthy correction” and consequently he started buying them up.

His Brexit basket includes more domestic-focused stocks and equities, including Legal & General, Lloyds and the house builder Persimmon which suffered a 25% loss in the wake of the UK’s leave vote. He’s also “nibbling” at Land Securities and British Land as part of a long-term strategy.

With his large cash holding, he’s looking for good anomalies and his message to investors is to “always buy when things get hammered”.

He adds: “You may have cash but you need to be willing to spend it. You should be buying when most people are running scared. Be disciplined and do it gradually. Don’t let the news put you off.”

Investors may want to look at the alternatives space

Gary Waite, portfolio manager of Alpha: r2 at Walker Crips, says he is drawn to the alternatives space.

He says: “Given the mixed economic outlook and political headwinds post Brexit our highest conviction ideas are all in the alternatives space. Our holdings include the Aviva Mult-Strategy Target Income fund, First State Global Listed Infrastructure fund and the Natixis H20 Multi Returns fund.

“With the liquidity and pricing issues faced by OEICs (Open-ended Investment Companies) in this space it’s certainly an area to avoid in the short-term.”

In the run up to the Brexit vote, and with the liquidity issues in bricks and mortar properties, it sold out all commercial property exposure held in OEICs.

Walker Crips also reduced its equity exposure, much like Coombs, in the belief there’s a “fundamental disconnect between what financial markets are currently pricing and the real economy”.

Normally portfolios would hold up to 2% cash, but Waite says dependent on the strategy, portfolios are currently holding 4%-7% in cash and cash-equivalent instruments.

In re-deploying cash, he favours a gradual, stepped, approach to re-investing: “Allocating to assets when economic data and news flow is supportive of the investment rationale or theme being played.”

‘Dare I say it but commercial property investment trusts are also worth a look’ 

For Rob Morgan, a pensions and investment analyst at Charles Stanley Direct, the aftermath of Brexit has demonstrated the power of diversification.

As a result he says if you have a sensible portfolio, you should “simply stick to what you are doing” though it may be worth considering whether it’s appropriate to undertake a ‘rebalancing’. This is where you take profits in areas that have performed well, and adding to areas that have lagged.

However, for investors who revised their portfolios, he follows the thoughts of Coombs and Waite in considering UK smaller companies funds.

“Although these tend to be more domestically-orientated and thus subject to a higher level of UK political risk, the recent falls have presented opportunities to buy into this dynamic area for the longer-term.

“Despite the prevailing environment of low growth there will undoubtedly be some success stories, and over a 10-year view I would expect this part of the UK market to outperform larger, more stable companies where a ‘certainty premium’ is attached.”

He highlights the Aberforth Smaller Companies investment trust, which has a value-orientated approach of aiming to buy companies at below their intrinsic value.

“This approach has been at odds with market sentiment recently, but I believe the experienced managers are well equipped to add value in the current environment. The trust’s shares are also trading at a double digit discount to Net Asset Value, which is an opportunity in itself if this closes over time – although there are no guarantees,” he adds.

He also fancies commercial property investment trusts given the dramatic falls across the sector. While there are question marks over the values of commercial properties as the UK extricates itself from the EU, and a fall in values is anticipated, he says many properties have long leases with companies and institutions that remain committed to the UK. This should mean they produce a healthy income stream, so while he wouldn’t expect much growth in capital, “the yield is highly attractive in what looks certain to be a low-interest rate environment for many years.”

As cash offers little return, he says investors will be pushed towards corporate bonds and the yields on offer from equities.

His parting message to investors is to stick with your investing plan and don’t let Brexit put you off your long-term strategy.

He says: “For those committing new money to investments and nervous of volatility I always suggest drip-feeding money into markets through regular savings rather than committing a lump sum in one go. This removes any decision-making involved with market timing, which can be a welcome relief.”