Andrew Morgan, Senior Portfolio Manager, Investment Strategy
Debate about “Brexit” has been rigorous since UK Prime Minister David Cameron announced 23 June 2016 as the date for the referendum on the UK’s membership of the European Union (EU). When this date was set in February the chances of the UK leaving the EU seemed less likely than it does today. But while recent polls have shown a narrowing between the ‘stay’ and ‘leave’ votes many Britons are reportedly undecided.
Leading the ‘remain’ camp the Prime Minister believes leaving could reduce trade resulting in job losses and delays in investment. US President Barack Obama also wants the UK to remain in the EU, as do leaders from other EU nations such as France and Germany.
The counter argument is that leaving could allow tighter immigration controls, reduce pressure on public services, housing and jobs. Business groups generally tend to support remaining, although inevitably there would be winners and losers.
So how does this affect QSuper and our members?
In the lead up to the referendum uncertainty has caused economic activity and investment in the UK to slow. Financial markets have exhibited greater volatility; in particular the value of the UK currency has depreciated against the currencies of many other developed markets. Meanwhile the global share markets have tended to fall and investors have sought the relative safety of government bonds.
Last week the US Federal Reserve left interest rates unchanged. Comments by Chair Yellen following the meeting indicated the UK's vote on whether to leave the EU impacted the US Central Bank’s decision to leave interest rates where they are.
From our perspective Brexit is a concern. The UK Treasury expects a relatively sharp recession if the UK leaves the EU and we acknowledge this risk. In the longer term the bigger issue stemming from a potential Brexit is whether it will lead to disruption in the EU, as other Eurosceptic countries potentially pursue an exit. In a world where global growth has been consistently softer than hoped for, a shock such as Brexit could increase the risk of other negative events around the globe.
So, how does this affect our positioning? Our Lifetime and ReadyMade options1 (Balanced, Aggressive and Moderate) are designed to weather a range of economic environments and shocks, but at the margin we adjust exposures in response to short term risks and opportunities.
Our approach is not to try to anticipate what politicians and markets will do in situations such as these. Rather, it is to consider asset prices in terms of long-term valuations and to buy, for example, if prices become attractive compared to these fundamentals. In fact investment opportunities may arise as a result of these events and we will evaluate these as they arise as part of our usual process. In the QSuper Fund portfolio we have reduced exposure to UK bonds and shares some weeks ago because of the risk of a potential Brexit. To be clear this is not taking a view on the outcome of the referendum, rather we reduced exposure to a risk at prices that seem reasonable.
In the longer term we believe it makes sense to maintain our diversified portfolio structure to increase the probability of meeting return objectives.
1 This investment strategy does not apply to the QSuper Socially Responsible option which is wholly invested in the Responsible Investment Leaders Balanced Fund and managed by AMP Capital Investors Limited.
The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only and you should get professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
Senior Portfolio Manager, Investment Strategy
As a Senior Portfolio Manager in the Investment Strategy team Andrew’s primary responsibilities relate to directing the positioning of the fixed interest allocation within the Fund.