City's global funds benefit from pound's Brexit plunge


UK-based funds with global portfolios have benefited from the pound’s steep fall after Britain’s June vote to leave the European Union

Many UK-based funds with global portfolios have made hay out of the pound’s steep fall after Britain’s June vote to leave the European Union, according to data from Morningstar and fund managers.

Such funds invest most of their money in equities and other assets overseas but book profits in sterling, which means the money returning to Britain now translates into more pounds.

Since Brexit, the pound has fallen by 17% against the dollar and 11.5% against a trade-weighted basket of currencies. Most analysts expect that downward pressure to persist as investors focus on continued economic uncertainty in Britain and anticipate continued loose monetary policy from the Bank of England.

For James Thomson’s portfolio that is not bad news.

“The sterling fall is a gift for UK-based global funds,” said Thomson, manager at Rathbone Global Opportunities Fund, which invests in anything from foreign-based videogames developers to a North Carolina funeral home operator.

The pound’s slump has boosted Rathbone’s returns to around 16% so far this year, up from flat before the referendum. He said that money flows into his fund have doubled since the vote, as UK-based investors look for more exposure abroad.

“We’re up by a lot and I can’t say it’s because of what I’m doing,” Thomson said.

Charlie Awdry, manager at Henderson’s China Opportunities fund, has also seen increased interest since the referendum. Returns on the fund are now 34% since June, compared with a 27% increase for the whole year, according to Morningstar data.

“On Brexit day, we had a dramatic increase in the value of the fund because of the drop of the pound,” Awdry said. “People were a bit surprised when they checked their statements.”

The pound has fallen against most currencies. Since the June vote, it is down 14.8% against the Australian dollar and 11.5% against Japan’s yen.

For the Man GLG Japan CoreAlpha Fund that has translated to a 42% gain since Brexit, more than the 28% increase year-to-date, according to Morningstar data as of Monday.

All these gains, of course, are at risk if the pound recovers.

Some economic data since the referendum has come in better than expected, and continued outperformance could boost the currency. Other currencies, particularly the euro, also have big question marks over them, given geopolitical and economic risks.

Most analysts, though, expect the pound’s weakness to continue into next year as Britain’s politics and the economy adapts to a post-Brexit reality. The UK government has said it aims to trigger the procedure of leaving the EU in the spring but negotiations are expected to take at least two years.

JP Morgan predicts the pound will trade at $ 1.23 against the dollar by March, while Deutsche Bank sees the British currency dropping to $ 1.14 by then.

The pound was trading at $ 1.249 early on the morning of November 24.

UK-based global funds also do have exposure to Britain in their portfolios, and so any negative economic impacts that might arise from Brexit. The British government on November 23 cut its 2017 economic growth forecast to 1.4% from the 2.2% forecast it made in March.

Rathbone’s Thomson slashed his exposure to UK assets to 15% from 25% within a month after the Brexit vote.

“The Brexit cloud will hang over Britain for a while and that is not good for anybody,” he said. “But for now, funds like ours are having their day in the sun.”

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This article was published by The Wall Street Journal

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