The make-up of portfolios and the importance of global equities

Investment portfolios can be comprised of assets from anywhere in the globe resulting in millions of different potential combinations. Whether you’re investing in an index or tracker fund (which tracks a particular index – like the FTSE 100 or global markets as a whole) or an active fund, where fund managers pick investments trying to back winners, the factors that influence your chances of success are infinite.

Some factors are a bigger influence than others though. The equities markets (where investments are generally made, along with government bonds) are dominated by US firms. In 2018, US companies accounted for over 53 per cent of total global equities – i.e. publicly listed companies that you can buy shares in. The UK was third on the list with 5.5 per cent, behind Japan on 8.4 per cent.

This is why fund managers are primarily concerned with global markets and conditions rather than the UK specifically. This is not to say that Brexit and a slump in the UK’s gross domestic product GDP will not have an impact on investments (as the UK is the 5^th largest global economy in terms of GDP) but it really depends on your individual investment portfolio design as to whether that will affect your investments.

How likely is Brexit to happen?

It would take a brave person to predict the outcome of Brexit right now given the political and legal wrangling that appears to lie ahead. However, Investec recently published a ‘thought experiment’ based on different Brexit scenarios and this was their conclusion:

Hard Brexit Impact: Assuming similar asset class impacts to the period around the Brexit vote, a hard Brexit on 31st October would see sterling-denominated portfolios rise by a low single digit percentage. The main driver would be the assumed 10% fall in £/$, meaning any non-sterling economic exposure would be revalued upwards due to currency translation effects.

Soft Brexit Impact: For a mirror image of the same reason (sterling appreciation repricing non-sterling economically exposed assets downwards purely due to translation), a soft Brexit could see a fall in sterling-denominated balanced portfolios of similar magnitude.

Again, this only becomes relevant to an investor if they have a portfolio with UK equities in it and even then, a large percentage of UK equities. Investec believes there’s an 80-20 chance of a hard and soft Brexit (if Brexit happens on 31^st October), so even equipped with that knowledge, the investor still might lose out if there’s a soft Brexit.

Don’t forget this is just Investec’s view of potential outcomes! Of course, this is all without mentioning the fact that previous predictions on economic performance have been somewhat wide of the mark ever since the EU referendum was announced.

What can anyone do about it?

Diversification is a fund manager’s best defence against a range of outcomes. As we reported last time in our article about political risk, fund managers have by and large already priced in Brexit.

Taking a long-term view, as all investment strategies should be, always helps as well. Brexit may feel like a monumental change – and this isn’t to downplay it – but historically speaking, the UK has survived World Wars and recessions. Our chart of investment performance over time illustrates the inherent resilience of investments in the face of major world events.

Understanding the context of Brexit and its impact on investments is another way of getting to grips with events. We may not be able to influence the outcome in many ways but feeling informed can make us feel in control of our own destiny and knowing experts are working on our behalf can bring additional comfort.

This is why Wren Sterling works with experts to manage investment strategies on behalf of our clients, while we ensure all of our clients’ finances are working as effectively as they can to achieve long term goals.

Let’s face it, too long spent thinking about the potential outcomes of a potential Brexit can leave anyone light-headed.