Smaller companies have lagged the FTSE 100 index since the Brexit vote, as the weaker pound has boosted the value of the overseas earnings of international companies in the main UK stock market index.
In our latest podcast, one top-performing smaller companies fund manager says that with a wide range of possible economic scenarios now in prospect following the referendum, he is investing in a combination of domestically focused firms on “very attractive valuations”, defensive and overseas earning businesses, and a core of companies capable of significant outperformance.
Explaining his post-Brexit “barbell” investment approach to Brewin’s head of research Guy Foster, Philip Rodrigs of the River & Mercantile UK Smaller Companies Fund says: “It’s a very uncertain environment – we just don’t know the shape of what might happen.” With possible scenarios including a repeat of the financial crisis or even a second referendum, he says: “It’s very difficult building a portfolio betting on one outcome or the other.”
The R&M fund comprises 20% domestically focused companies where performance has been very weak since the referendum and therefore now offer low valuations, with a further 20% in defensive and foreign earners whose performance, Rodrigs says, should counter-balance the UK exposed businesses.
The other 60% is focused on companies that Rodrigs says offer the potential for “alpha generation” – businesses that will significantly outperform the average and deliver strong long-term returns. Meanwhile he has sold out of companies where post-Brexit uncertainty has damaged outlooks.
Also in our podcast, Brewin’s Guy Foster talks to David Smith, Economics Editor of the Sunday Times, about Europe.
To listen to this or other Brewin Dolphin podcasts, go to www.brewin.co.uk/sharing-our-thinking/podcasts
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