Gold alternatives in the post-Brexit world
By Kirsten Hastings, 26 Sep 16
With gold having been one of 2016’s most popular defensive strategies against persisting low returns and the struggle for income, Legal & General Investment Management’s multi-index fund range manager Justin Onuekwusi outlines four alternatives to gold for the post-Brexit world.
“In contrast to 2015, 2016 has proved a challenging year for active UK equity funds: the average manager has underperformed the FTSE All-Share Index by over 4% year-to-date.
“A reason for this has been the strong performance of the FTSE 100, which makes up the largest 100 companies in the FTSE All Share. Given the huge falls in the value of sterling in 2016, the FTSE 100 has significantly outperformed the FTSE 250 – returning almost 14% versus just over 5%. Amazingly, this would place the FTSE 100 Index in the top decile of the IA All Companies sector year to date.
“History shows the average active UK manager underperforms when mid-cap companies suffer significant underperformance. Relative to other developed equity markets the FTSE All-Share is uniquely concentrated. Indeed, the top 10 stocks constitute over 40% of the overall weight of the FTSE All-Share.
“To outperform, UK equity managers will typically have to descend the capitalisation spectrum and adopt more mid-cap risk. However, as sterling falls – which it has been doing both pre- and post-EU referendum – larger caps benefit because some 75-80% of their revenues are driven from overseas, versus only around 50% for many mid-caps. If sterling continues to weaken, this trend of underperformance is likely to continue – which would of course benefit an index strategy over active funds.
“While many investors have benefitted from a structurally lower weighting to mid-caps in favour of large-caps in 2016, they may want to start increasing their mid-cap exposure again if they believe we are coming to the end of sterling weakness.
“However, it is important to remain vigilant of the risks, because a weighting to a UK index fund – and specifically, a large cap strategy – could help to hedge any further Brexit uncertainty over the medium term.”
Tags: Brexit | Gold | Legal & General | Oil
