The result of the Brexit vote shocked many of us. There were some fund managers who had actively positioned their funds for a remain vote. For other funds, there was little they could do. For example, following the referendum European and UK smaller and mid cap companies trusts sold off as concerns over Europe and UK domestic growth deepened.
Another side effect was a marked depreciation of the pound, boosting those funds with significant assets overseas and impacting UK companies with significant export or import businesses. Despite a post-US election bounce, sterling has fallen over 16 per cent since the Brexit vote.
Looking at the global equity income sector, Henderson International Income Trust (HINT) is the only global income trust without any UK exposure. The logic behind its launch in April 2011 was to offer a practical way of diversifying investors’ sources of dividend income. It was launched when many UK equity income funds were struggling to maintain their dividends, as a number of large dividend payers in the UK index had cut or passed their dividends in the wake of the global financial crisis.
The majority of the dividend income generated by the UK market comes from a handful of stocks in a narrow range of sectors. The manager of HINT, Ben Lofthouse, thinks there is a real need, for any investor relying on the income from their investments, to diversify these streams by including overseas stocks in their portfolio.
The collapse of sterling following Brexit has already begun putting pressure on retailers and importers of goods for resale in the UK.
Unilever’s spat with Tesco, the 10 per cent price hike for Walkers crisps (which PepsiCo blamed on Brexit) and the redesign of Toblerone’s UK range are all evidence of brands trying to adapt to the impact of the weaker currency. Lofthouse believes that imported inflation and the difficulty of passing that on to financially stretched consumers could be another problem area for UK dividends.
By contrast, not only has HINT’s NAV benefited from sterling weakness (to the
tune of 17.1 per cent), but its income account is looking healthier as dividends paid in dollars and euros are worth more to a UK investor.
As another example, sterling weakness has benefited the net asset value of funds such as utilities and infrastructure trust Premier Energy & Water (PEW).
The trust’s NAV is denominated in sterling but has significant assets overseas. PEW is structurally short sterling; it has far more sterling-denominated borrowings (in the form of its zero dividend preference shares or ZDPs) than UK assets. Like all of its currency exposure, PEW’s exposure to sterling is
unhedged. This has allowed PEW’s NAV to rise some 22.8 per cent (to 14 November 2016) since the referendum result and the fund would benefit from any further sterling depreciation.
The trust’s strong focus on emerging markets means that it has relatively little exposure to domestic UK companies (9.5 per cent of the portfolio at the end of August).
Another benefit is the nature of its exposure. Utilities are, to a large extent, focused on their own domestic markets and tend to engage in relatively little cross-border trading. As such, the forthcoming EU exit negotiations, and the recent exchange rate shifts, are likely to have limited impact on the underlying businesses.
What’s more, as regulated entities, the revenues and profits of the UK portion of these companies’ activities are cushioned from any post-Brexit slowdown in the UK’s economy.
Matthew Read is senior analyst at QuotedData