Just over six months since Article 50 was activated, the UK’s exit from the EU continues to edge closer with little clarity about the future relationship with the bloc.
Indeed, ongoing speculation and political in-fighting has fuelled concerns about the lack of a post-Brexit trade agreement.
To measure the impact of the referendum result, index provider Bats launched two Brexit-focused indices earlier this year.
The Brexit Low 50 and Brexit High 50 each contain 50 companies from the Bats UK 100 – which tracks the top 100 UK-listed stocks by market capitalisation – split into those with the largest and smallest sterling revenues.
The Brexit Low 50 is made up of the 50 companies with the smallest sterling revenues and thus should have a more international focus. Indeed, just 10 per cent of revenues are derived from the UK.
Conversely, the Brexit High 50 is composed of the 50 companies with the largest exposure to sterling revenues and as such should have a bigger exposure – around 72 per cent – to the domestic economy.
Performance of indices since EU referendum
Source: FE Analytics
Since the referendum the Bats Brexit Low 50 index has returned 33.28 per cent while the Bats Brexit High 50 index is up by 18.64 per cent, as the above chart shows. In comparison, the Bats UK 100 index is up by 28.69 per cent.
According to Bats, industries with a low exposure to UK earnings include consumer non-cyclicals, energy, healthcare, non-energy materials, technology, and business services.
Industries with a high exposure to domestic earnings, meanwhile include finance, utilities and telecommunications.
Below FE Trustnet has considered which funds have a high correlation to the Bats Brexit Low 50 index and how they have performed since last year’s referendum. It should be noted, however, that none of the funds are benchmarked against the Brexit Low 50 index.
To measure which funds have a high correlation to the index, FE Trustnet used the r-squared ratio, which indicates how closely correlated a fund is to an index. With more than one years’ worth of data, FE Trustnet used the monthly return figures.
According to FE Analytics, a figure upwards of 0.7 suggests a fund’s behaviour is closely linked to a benchmark.
Unlike the Brexit High 50 index, many of the funds with the closest correlation to the Brexit Low 50 are index trackers.
Indeed, the fund with the highest r-squared ratio relative to the index was smart beta strategy Candriam Equities L United Kingdom fund, which stood at 0.88.
The first actively-managed strategy to appear in the rankings is MFS Meridian UK Equity fund. The £48m fund is overseen by Christopher Jennings, and is joined by deputy managers Victoria Higley and Gabrielle Gourgey.
Performance of fund vs sector & index since EU referendum
Source: FE Analytics
As the chart above shows, the fund has returned 23.16 per cent since the referendum, underperforming both the average IA UK All Companies fund return of 29.67 per cent and a gain of 29.13 per cent for the benchmark FTSE All Share 5% Capped index.
The high conviction fund invests in a portfolio of high quality companies focusing on secular change, sentiment and valuation.
While financial services – a sector deriving a large proportion of income from the UK – is its largest sector weighting, it is also its largest underweight.
Additionally, it counts energy giant BP as its top holding, non-cyclical consumer stocks British America Tobacco and Diageo, and mining company Rio Tinto among its top holdings.
The £326.9m Old Mutual UK Equity fund, managed by Simon Murphy, is the next actively-managed fund among the UK equity sectors with a high correlation to the index and an r-squared figure of 0.81.
The concentrated fund has a relatively uncomplicated investment objective of achieving long-term growth through a diversified portfolio of UK stocks and invests at least 50 per cent of the portfolio in FTSE 100 companies.
The fund has no style bias and holdings are typically categorised as falling into three areas: ‘undervalued equity’, ‘internal change’ and ‘external change’.
‘Undervalued quality’ stocks are those with the potential to outperform for longer than is implied by the share price due to superior quality in a range of factors. ‘Internal change’ companies are those undergoing a tangible change that will materially boost future returns or growth while stocks in the ‘external change’ area will benefit from changes affecting an industry or structurally.
Since the referendum, the fund has returned 27.42 per cent, underperforming the IA UK All Companies average and the FTSE All Share benchmark return of 29.33 per cent.
Performance of fund vs sector & index since EU referendum
Source: FE Analytics
“With no singular investment style the fund will rarely lead the peer group over shorter time frames, though should not necessarily be expected to,” noted analysts at Square Mile Research.
Its top holding is consumer discretionary stock British America Tobacco, representing 4.8 per cent of the portfolio. Other stocks in the portfolio’s top 10 include oil stocks Royal Dutch Shell and BP, as well as miners Rio Tinto and Glencore.
As with many IA UK All Companies funds, the portfolio’s largest sector weighting is to financials, which has a high weighting to domestic earnings. However, it also has significant exposure to low UK earnings sectors such as basic materials, healthcare and oil & gas.
Murphy has previously warned on the impact of Brexit and the potential for geopolitical events to cause a major bout of risk aversion in markets.
He noted at the end of September: “Whilst it is usually correct to ignore the worst of the doomsday scenarios, we do worry about the potential for an extremely messy Brexit process and about the tricky task of finding a resolution to the North Korean issue that enables both sides to save face.”
As such, Murphy said it remained “extremely cautious in our outlook for durable UK equity gains in the period ahead”.
The third fund with a higher r-squared ratio relative to the Bats Brexit Low 50 index is the 7IM UK Equity Value fund.
The £125.1m team-managed fund has an underweight position in financial stocks relative to its MSCI UK index benchmark, as well as in several other areas with higher exposure to domestic earnings such as consumer staples and telecommunications.
The team noted in the annual report earlier this year that Brexit negotiations would be a key focus for the fund and whether it would be a ‘hard’ or ‘soft’ exit and the effect on financial markets.
“However, as globally-focused investors, with a relatively low exposure to UK assets, the sub-fund’s current positioning provides some protection against the potential political and economic fallout from the Brexit negotiations,” they further noted.
The fund has returned 27.75 per cent since the referendum, although it too has underperformed the average IA UK All Companies sector peer and the MSCI United Kingdom benchmark’s 28.65 per cent gain.
Other funds with an r-squared of 0.7 or more include: Family Charities Ethical, Schroder Prime UK Equity, Scottish Widows UK Growth, JPM UK Equity Blue Chip, CF IM UK Growth, Halifax UK Growth, Newton UK Income, L&G (A&L) Capital Growth, Family Asset, HSBC Merit UK Equity, Sarasin UK Equity, Barclays GlobalAccess UK Alpha, JPM UK Equity Core, Sarasin Fund for Charities Thematic UK Equity and Henderson Inst Mainstream UK Equity Trust.