This post is a condensed version of our technical Client Insight, which you can read in full here.
There is always a temptation to fiddle around with a portfolio’s structure to try to position it ready for potential short-term global events, such as Brexit.
Investors would do well to remind themselves that the core tenets of good investing hold true through all market conditions. It is also worth remembering that the efficacy of a portfolio’s strategy should be judged not on the post-event outcome, but in terms of the quality, validity and prudence of its construction discipline in the face of future market uncertainty. Portfolios are well-structured around inalienable investment truths, particularly the value of deep diversification.
Irrespective of what might happen in the future – including any of the potential permutations of Brexit – as investors we can rely on a number of truths: markets work pretty well and are hard to beat, so capturing the market return on offer using lower-cost, well-structured products makes good sense; spreading our assets broadly to ensure the risks we face are well-diversified will always sit at the core of a successful long-term strategy; balancing out the risks of equities by owning high quality bonds provides a good insurance policy; being patient (living through the short-term dips) and being disciplined (maintaining your philosophy and strategy over time) are fundamental to achieving the returns you need to fulfil your financial goals. At this point – given the short-term uncertainty, and possible anxiety, over Brexit – let’s focus in on diversification.
There are many ways in which an investor can be diversified, from individual securities to sectors, countries, investment styles and assets classes. Owning a portfolio that includes many thousands of companies, all market sectors, spread across developed and emerging economies, reduces the risk of being caught out by material negative impacts in specific markets, such as the UK. In the UK a few names dominate;  the top 10 stocks represent more than 35% of the total UK market and the largest – HSBC – weighs in at 5.3% of the broad UK market.
A market-capitalisation weight to stocks across all developed and emerging markets shows a very different, well-diversified picture. The largest listed company in the world is Microsoft at 2.2% of the market. It is worth noting that Microsoft’s market capitalisation is over US$1 trillion, compared to HSBC’s US$150 billion.  In a global market capitalisation weighted portfolio, HSBC’s weighting is greatly reduced to under 0.5%. Astute investors’ portfolios hold material allocations to non-UK equities and the majority of companies that this represents.
Sector diversification also makes good sense. Owning a material allocation to global stocks ensure that sector exposures are diversified. The UK has some large sector allocation differences compared to the world as a whole; in particular it has no major technology companies like Microsoft, Amazon and Google, despite technology stocks representing around 15% of global equity markets. UK exposure to technology stocks is less than 3%. The UK also has material overweights to the energy and basic material sectors.
Portfolios are well-positioned to weather Brexit uncertainty
Brexit and the political chaos that we see before us, combined with the polarisation of politics between quasi-Marxist policies on the left and populist rhetoric on the right is unsettling for all. We are where we are, unfortunately, whatever one’s Brexit views or political persuasion. Yet there are commonalities in all client portfolios such as broad diversification, excellently managed, lower cost products and high quality bonds, that we can all rely on to see us through this mess. If it ain’t broke, don’t fix it. Portfolios are as well positioned as they can be for whatever lies ahead. Please try not to worry too much about your portfolio. It is in good shape.
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
