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Funds to consider following the hung parliament result

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A high level of uncertainty following yesterday’s General Election result has the potential to create an extended period of volatility for UK investors. Which funds can they turn to for stability?

The UK stock market has enjoyed a strong run of performance since last June’s shock Brexit vote, driven by a weaker pound and a rebound in commodity stocks. However experts predict the hung parliament result is likely to provide a weaker outlook economically and given the uncertain scenario going forward, equity markets also look set to weaken.

Ryan Hughes, head of fund selection at AJ Bell, says the key thing for investors is not to make knee-jerk reactions. However for those who are still looking to invest or have existing holdings and want to think about how to position in this period of instability, there are some things to consider.

“Most will be long-term investors and in the grand scheme of things, if you have over 20 years to go until retirement, events overnight are unlikely to majorly impact the financial plan,” says Hughes.

“The place where uncertainty is likely to be felt most is in currency markets. Sterling has weakened as investors move away from the currency and this can be positive for some investments. Those investors who have exposure to overseas equities will have seen this last year following the Brexit outcome and closer to home, with the FTSE 100 Index being so reliant on overseas earners, this may be a place to look for returns.”

Hughes says one way of gaining exposure to this is through the Majedie UK Equity fund which has a large cap bias and has an excellent track record of investing in UK equities. Meanwhile he adds that those preferring passive solutions may like the iShares Core FTSE 100 ETF.

“For those a little more uncertain, an absolute return approach may be interesting. These managers can make money from both rising and falling share prices and may be well placed to capitalise on the instability in the market,” he says. “While these types of funds are not necessarily trying to make large profits, they do often protect capital when the environment is more challenging.”

In this space, Hughes says AJ Bell’s preferred choice is the Henderson UK Absolute Return fund.

“Run by the highly experienced Luke Newman and Ben Wallace, their risk controlled approach is attractive for those wanting to have some exposure to equities but without taking all of the risk that comes with buying a traditional equity fund,” he says. “While, if UK equities do perform well, this fund will be left behind, should things get ugly, they have proven on many occasion that they are great at protecting investors’ capital making it a great choice for those looking to diversify away from traditional long only investing.”

Like Hughes, Adrian Lowcock, investment director at Architas, cautions on overly acting on an election result.

“As we saw following both the Brexit vote and the US presidential election, markets were incredibly resilient and shrugged the surprise results,” says Lowcock. “By the time individual investors will be able to act, the markets are likely to have priced in the shock result.”

In addition to investors taking their time, Lowcock also advises they review their investments. “Events like this often bring into focus shortcomings in a portfolio,” he says. “Take the opportunity to review your investments in preparation for the next event, known or otherwise.

“Also be diversified. The best way to prepare a portfolio for events is to be well diversified, that way your portfolio will be better placed to weather any storms.”