While volatility did hit the markets, as predicted, Mr. Horne said it was “disappointing” that it only lasted a couple of weeks. “There was some selling but it was largely technical — most investors were rational, with no run for the hills. We picked up what we could, but really the market got itself back to a rational place quite quickly. There was an opportunity ... it was all too brief,” said Mr. Horne.
Due to opportunities thrown up by Brexit, managers also re-evaluated their positions. A popular trade in the runup to the vote was to short U.K. sterling. Executives at BNP Paribas Investment Partners, Insight Investment and Robeco said they took short positions on the sterling but have since altered their exposures.
“We are not as bearish on sterling as we were before,” said Daniel Morris, senior investment strategist at BNP Paribas Investment Partners in London. He said that as Brexit plays out, the effect on the currency will not be so hard. “There has already been a fairly significant decline, and so (we have moved) from bearish to neutral.”
Taking a short position on sterling was a “crowded trade,” said Matthew Merritt, head of the multiasset strategy group at Insight, based in London. The manager started to build a short position on sterling in February, but viewed Brexit as an event that “would have been a catalyst for further weakness in the pound.”
The firm also had a preference for gilts, in part reflecting a “dislike of negative yielding bonds elsewhere,” and had a number of trades such as long FTSE 100 — where the majority of revenues are earned overseas — and short FTSE 250, “which would work on the basis that if sterling goes down, that's good for U.K. stocks with an international bias.”
On Aug. 4, the Bank of England cut interest rates by 25 basis points to 0.25% and restarted its quantitative easing program. That further depreciated the pound, but flooded the market with stimulus — yet Article 50, which will kickstart negotiations on the U.K.'s exit from the EU — has yet to be triggered. “We have had a lot of stimulus pushed into the market, but the debate of when (the U.K. triggers) Article 50 is ongoing, and there is virtually no probability it will happen this year. So against that background, we faded some of those positions; some of our long gilts over other markets, most obviously (German) bunds, we have taken off. We have stepped away from our large-cap/small-cap trade, and we faded certainly the size of our position on sterling,” said Mr. Merritt.
He said Brexit was a difficult situation from a portfolio management perspective, particularly given that the consensus view was that the vote would not result in leaving the EU. “On that basis, to some degree, we didn't have the whole portfolio skewed toward a view of Brexit. We had a strategy that recognized that the greatest challenge, particularly to risk assets, was lack of growth,” and that a vote to leave would exacerbate growth fears.
The multiasset team will “re-engage with those (positions) at some point in the future, but we've had the policy response and we're still some way off from seeing the real uncertainty that is going to come through in discussions” and negotiations regarding the actual exit.
Barings multiasset team had a significant underweight on sterling around Brexit. Prior to the vote it was 30% underweight, and at one stage moved to 40% underweight, said Marino Valensise, head of multiasset at Barings. However, at the multiasset investment committee meeting in August, “we upgraded sterling from underweight to neutral. Members of the strategic policy group "'have now decided to close those positions in their portfolios and we are buying back some sterling.” n