On December 11 2018, Sterling fell to a 20-month low against the dollar immediately after Prime Minister, Theresa May delayed the parliamentary vote on her Brexit deal.

With no end in sight to UK political uncertainties, is it better for investors to consider investment companies with a low exposure to Sterling?

“We expect Sterling to be an important factor in investor’s returns in the weeks ahead and think it is worth reviewing the sensitivity of the funds investing internationally to changes in Sterling. The circa 13% weakness in Sterling against the US Dollar since April has been particularly beneficial for the NAV performance of those with high US weightings,” investment firm Stifel said in a research note.

Hedging

According to Stifel, a few trusts actively hedge their Sterling exposure regularly.

Source: The AIC, October 2018 stats, company data, excludes trusts with market caps below £150m

Investors fleeing the UK?

Iain Scouller, managing director at Stifel said in a recent interview in Portfolio Adviser there are three factors making investor flee the UK:

  1. Investors are increasingly looking for businesses that have a global reach – many of the fastest growing businesses have been international and particularly US e.g. Amazon – some trusts such as Scottish Mortgage have a focus on growth companies and this has made invest internationally.
  2. Investors dislike uncertainty and clearly at present there is plenty in the UK given the impasse in parliament. There are also concerns about the risk of a socialist government, with nationalisation and a higher corporate tax agenda.
  3. Income – 15 years ago trusts that wanted to pay high dividends had to invest in the UK to generate a high enough income to pay out a large dividend. This has changed with many companies in Asia and emerging markets now paying high dividends.

“We do think that if parliament approves an EU withdrawal package in the next few weeks, we could see a strong rally in sterling and UK domestically focused shares – in such a scenario the funds that have benefited from weak sterling and high overseas exposure could underperform the more UK-orientated funds,” said Scouller.

Sabuhi Gard is an investment writer at Incisive Works.

Further reading on this topic:

In times of volatility, where are the safe havens?