Brexit aftermath: defensive fund and stock picks to shelter your portfolio
The momentous outcome of the referendum, which will see the UK leave the EU, sent the FTSE 100 and FTSE 250 plunging with housebuilders and financials worst hit, while share prices in gold and gold mines surged.
For investors looking to weather the Brexit storm, defensive stocks and funds whose performance isn’t determined by cyclical economic movements may offer protection.
Before making any rash decisions, Adrian Lowcock, head of investing at Axa Wealth, says investors should think carefully as company share prices have swung wildly since the result.
Gold miners, utilities and pharmaceuticals all rose on both Friday and today as many investors turned to defensive assets.
However, markets are likely to remain volatile for some time, so it is important your portfolio is well positioned and diversified to protect from further falls.
Defensive fund picks
CF Lindsell Train UK Equity
Lowcock picks this fund as it invests in businesses which produce a high stable return on capital. He says: “They tend to be globally-focused businesses which would benefit from the weaker currency.”
He adds that the portfolio has significant exposure to consumer goods and services as well as specialist financials, though the latter has suffered since the result was announced.
CF Woodford Equity Income fund
Lowcock says Woodford is generally defensively positioned with larger exposure to tobacco and pharmaceutical businesses, and “both areas will benefit from a weaker pound while their global exposure will protect them from any deterioration in the UK economy.”
Darius McDermott, managing director at Chelsea Financial Services, also picks the Woodford fund, saying the manager was very downbeat on the prospects for the UK economy in the short term even before Brexit.
“He’s also very experienced and has navigated investors through all sorts of market shocks in the past so this will reassure many.”
Fidelity Global Dividend
McDermott says this fund, like Woodford’s, was also defensively positioned pre-Brexit and invests in non-sterling denominated stocks so it will have benefited from the pound’s fall.
“The manager also has very little exposure to banks or insurance companies, which could be the biggest losers,” he says.
Henderson Strategic Bond
Rob Morgan, pensions and investment analyst at Charles Stanley, says as part of a defensive strategy, he would include an element of bond exposure because demand for reliable income is “not going to go away”.
With the prospect of interest rate cuts which is a highly supportive environment for bonds (provided default rates do not rise significantly), this fund should provide sensible, diverse exposure to fixed interest markets because the managers, John Pattullo and Jenna Barnard, are permitted a great deal of flexibility as to where they can invest.
Investec Cautious Managed
McDermott says the manager, Alastair Mundy, has been “very bearish for some time”, so has had a very defensively positioned fund and a decent exposure to gold, which has helped in the past few days. He says Mundy is a very experienced investor who has seen all types of market and shock.
JPM US Equity Income
For Lowcock, the high political risk in the UK and Europe means the US offers a defensive currency and stock market which is less sensitive to the events in Europe.
He says: “This fund has exposure to the US large cap space which provide access to some excellently managed businesses. While the region is not cheap, we believe US earnings are set to improve in the third quarter of this year.”
Jupiter Absolute Return
Targeted Absolute Return funds that aim to make money in both rising and falling markets are also worth considering, says Morgan, as they create an element of your portfolio that is not sensitive to directional movements in the market.
“In this area I would highlight that the fund managed by the experienced James Clunie, who has posted a positive return in the referendum aftermath – albeit early days,” he says.
M&G Global Dividend
Morgan says global funds – both equities and bonds – have provided positive returns in the last few days largely due to the sharp fall in the pound.
“A broad, larger company-focussed international fund with a bias towards strong, dividend-paying stocks such as M&G should provide a solid core holding for the long term,” he says.
Defensive stock picks
Lowcock generally prefers funds, but he says a stock pick to consider is AstraZeneca.
“It has been lagging a while now since it rebuffed a takeover bid from Pfizer while the business continues to progress and it is reaching a turning point – when its patent cliff comes to a head the business can look towards providing revenues,” he says.
McDermott also picks this stock as people and governments will keep buying drugs no matter what, and 90% of its revenues are from outside the UK while most of its research costs are in sterling.
BP and Shell
McDermott says BP is more of a contrarian bet as the oil price would need to recover (there’s been a small recovery since it hit a 13-year low of $30 in January 2016) and hold at a higher level and for the global economy not to falter too. But most of its revenues are in dollars and costs in pounds.
For Morgan, because energy companies also sell what they produce predominantly in US dollars and have little exposure to the UK domestic economy, the fall in the pound means the earnings are more valuable. As a result, he says investors could consider exposure to Shell.
For Morgan, backing reliable international companies is sensible when planning a more defensive portfolio. He picks multi-national consumer stocks such as Reckitt Benckiser as it should see only a small impact from any weakening demand in the UK but a boost in overseas earnings from a weakened pound.
Morgan says: “Also they produce well-known everyday branded items that are bought habitually so their earnings should be highly defensive.”
For the same reason Morgan picks Shell, he also chooses mining giant Rio Tinto, though over the longer term, a slowdown in global growth as a result of Brexit would likely have a more negative impact.
McDermott says that Unilever generates most of its revenues from outside the UK and it sells goods that people need no matter what, so they will buy regardless of the state of the economy.
He adds that it also pays a decent yield of about 3%, which is an “added bonus when gilt yields have dipped below 1% for the first time, and most of its costs are in sterling and revenues in other currencies, so overall, it makes doing business cheaper for them.”