A decade of Brexit
Managers reflect on the impact of the Brexit vote
“This decade has been a rollercoaster ride for investors with the Brexit vote, the pandemic, rising interest rates due to the war in Ukraine and the recent conflict in Iran all impacting markets.”
Nearly ten years since the UK voted to leave the European Union on 23 June 2016, the Association of Investment Companies (AIC) invited UK investment trust managers to discuss Brexit’s impact on UK companies and the London market, as well as assessing what opportunities lie ahead.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “This decade has been a rollercoaster ride for investors with the Brexit vote, the pandemic, rising interest rates due to the war in Ukraine and the recent conflict in Iran all impacting markets. Despite these political and economic shocks, investment trusts have continued to perform strongly, with the average investment trust returning 174% since the Brexit vote. The UK has struggled but has bounced back recently, with the average trust in the UK Equity Income and UK Smaller Companies sectors returning 123% and 93% respectively since the referendum.
“There’s no knowing what the next decade will bring but investment trusts have many benefits to help them deliver for shareholders over the long term. They provide permanent capital which allows managers to take a long-term view of their portfolio and invest with conviction, even during times of volatility. And their income advantages allow investment trusts to deliver robust and growing dividends in good and bad times. They have independent boards of directors to represent shareholders’ interests and investors can vote and attend AGMs, giving them a say on the future of their company.”
To discuss the challenges and opportunities facing UK investment trusts post-Brexit, a webinar was held on 9th June by the Association of Investment Companies (AIC) featuring James Henderson, Fund Manager of Lowland Investment Company, Mark Niznik, Fund Manager of Artemis UK Future Leaders and Simon Gergel, Lead Portfolio Manager of The Merchants Trust. Their comments are collated below alongside views from Imran Sattar, Manager of Edinburgh Investment Trust and Dominic Younger, Manager of CT UK Capital and Income Trust.
Is the UK market still suffering from a Brexit discount?Dominic Younger, Lead Manager of CT UK Capital and Income Investment Trust, said: “We think that is possible, although it is now as much a sentiment and capital allocation issue as a purely Brexit-related one. UK equities still trade at roughly a 30-35% discount to the US on a P/E basis, with the deepest discounts lower down the market cap spectrum.
“Encouragingly, corporate activity, from buybacks and overseas M&A, suggests that strategic buyers agree with our view on CT UK Capital and Income Investment Trust that there is a clear mispricing, even if public markets remain sceptical.”
Opportunities since the Brexit voteSimon Gergel, Lead Portfolio Manager of The Merchants Trust said: “Since the Brexit vote we have seen a succession of events causing extreme sector rotation, including the Jeremy Corbyn/Boris Johnson general election, the Covid-19 pandemic and the wars in Ukraine and Iran. These have led investors to re-evaluate the attractions of certain groups of companies against others, leading to periods of significant polarisation within the stock market.
“We have not changed our investment approach, but we have been able to take advantage of anomalies where we have seen share prices diverge from long-term fundamental or intrinsic value. The investment trust structure, with permanent capital, enables us to build positions in stocks and take a long-term view, without the risk of being forced to sell for short-term liquidity reasons.”
“The investment trust structure, with permanent capital, enables us to build positions in stocks and take a long-term view, without the risk of being forced to sell for short-term liquidity reasons.”
Dominic Younger, Lead Manager of CT UK Capital and Income Investment Trust, said: “The most obvious opportunity has been valuation. Persistent outflows and weak sentiment have left UK equities trading at a material discount to global peers, particularly outside the mega caps, despite broadly resilient fundamentals. The result has been a UK market that is under-owned, undervalued and, in our estimation, unduly overlooked.
“Our approach to investing has not fundamentally changed; if anything, it has reinforced our bias towards good quality corporate franchises where we see an abject disconnect between price and intrinsic value. We have leaned into areas where investor sentiment has deteriorated but long-term fundamentals are robust and cash generation and balance sheet strength remain healthy. Fortunately for us, there is plenty of opportunity out there.
“In this uncertain era, it’s worth emphasising the shock absorbing qualities of the UK market versus developed peers. Its high quotient of defensive businesses, inflation-hedging commodities, and profusion of hard assets have historically stood it in reasonable stead during such bouts of global risk aversion.
“It is therefore our view that UK equities still represent a compelling place to invest. Even after the market’s outperformance over the last year, UK stocks remain cheap relative to global averages and to their own history.”
“The main reason for optimism is that the valuation starting point is just so low now.”
What makes you optimistic about your portfolio over the next ten years? Mark Niznik, Fund Manager of Artemis UK Future Leaders, said: “The main reason for optimism is that the valuation starting point is just so low now. The median company in our portfolio is forecast to grow earnings by over 10% next year yet is being valued on only 9x consensus earnings and a 10% free cash-flow yield.
“The return on capital of that median company is over 20% and it has no net debt. We would argue that this is around 50% mispriced given those characteristics. Interestingly, we have had 38 of our holdings bid for over the last six years at an average take-over premium of 48%. This shows that other corporate acquirers and venture capitalists also see the value in companies with these attributes.”
Imran Sattar, Portfolio Manager of Edinburgh Investment Trust, said: “We are enthusiastic about the investment case for the UK – almost the entire Edinburgh Investment Trust portfolio is invested in UK equities, despite us having the flexibility to invest up to 20% outside the UK. This reflects the particularly compelling opportunity set across the UK stock market at present, both in terms of the absolute quality of some businesses as well as their valuations relative to international peers. We think this combination is a great starting point from which to generate attractive long-term returns.
“We are enthusiastic about the investment case for the UK – almost the entire Edinburgh Investment Trust portfolio is invested in UK equities, despite us having the flexibility to invest up to 20% outside the UK.”
“Irrespective of how the broader AI investment landscape develops, in recent months we have been adding to a selection of derated data and analytics companies that we judge will turn out to be long-term winners from the AI revolution. These include Softcat, the value-added reseller of technology to medium-sized businesses, Sage, the HR/accounting/payroll software developer, and the London Stock Exchange Group.
“Away from future AI beneficiaries, we hold shares in the specialised instrument companies Oxford Instruments and Renishaw. They have experienced some short-term cyclical weakness in their end markets, despite remaining being long-term structurally advantaged businesses.
“Finally, and reflecting our desire to manage a balanced and diversified portfolio, we have also introduced two new positions in cyclically depressed, and lower valuation, construction and repair / maintenance / improvement businesses: Marshalls and Ibstock. Both are wider out on the risk/return spectrum, which suits our patient style of investing, and have been sized accordingly.”
Simon Gergel, Lead Portfolio Manager of The Merchants Trust, said: “Over the next ten years we should see a step up in UK construction activity. There is a well-known shortage of housing, ageing infrastructure, as well as a need to expand electricity generation and transmission.
“The government has a target to increase housebuilding and has been reforming planning rules. This should be very supportive for several companies in the portfolio, like the housebuilder Barratt Redrow, the aggregates and cement company Breedon, the roof tiles and paving manufacturer Marshalls and the bathroom products company Norcros.
“These companies generally have very strong competitive positions, but tough industry conditions and poor investor sentiment have weighed on their valuations. The benefits for long term investors, through investment trust structures like The Merchants Trust, could be substantial.”
On closer ties with EuropeSimon Gergel, Lead Portfolio Manager of The Merchants Trust, said: “For most UK listed companies, the UK’s ties with the EU are not that critical. Most businesses are either multinational, like GSK, Shell or Unilever, or predominantly domestic like Marks & Spencer, Barratt Redrow or Severn Trent. Where listed companies do trade with the EU or import and export goods they are normally able to deal easily with any extra administrative burdens that can be more challenging for small (typically unquoted) businesses.
“For most UK listed companies, the UK’s ties with the EU are not that critical.”
“As such, the direct impact from any closer ties with the EU on listed companies will be minimal. However, there could be an impact on investor sentiment and potentially on economic growth, depending upon what is agreed.”
All performance data is share price total return excluding 3i and VCTs from 24/06/2016 to 22/06/2026. Source: theaic.co.uk / Morningstar.
