Trusts investing in UK smaller and mid-cap companies could be the prime beneficiaries of a Brexit deal, experts have said.
A report from broker firm Stifel, published today (September 26), stated small- and mid-cap companies which tended to be in sectors relatively focused on domestic earnings were likely to do well if the UK left the EU with a deal on October 31.
The pound is expected to fare better under a Brexit deal than a no-deal scenario and so companies focused on UK earnings will get a boost from a deal, in turn leading to higher returns for trusts.
According to the report the FTSE 250 Index, composed entirely of small- and mid-cap companies, fell mid-August at a time when there was talk of a ‘no-deal’ outcome but experienced a marked recovery as hopes of a potential deal rose.
FTSE performance (%) over 6 months to September 24, 2019 (rebased to 100):
Source: Datastream
Ian Scouller, analyst at Stifel, said: “[Smaller and mid-cap] companies tend to be in sectors which are relatively highly focused on domestic companies, notably sectors such as housebuilders and leisure.
“We noted that on days when there has been newsflow suggesting a deal may be possible, many of the UK focused companies, such as the housebuilders, have seen their share prices move up sharply.”
Mr Scouller thought this suggested this segment of the market was likely to remain volatile for the next few weeks but there was scope for “significant re-rating” if a deal was done.
The report also found many trusts categorised as ‘smaller companies’ would benefit from the effect of a Brexit deal.
This was because such funds actually had relatively high weightings in FTSE 250 companies (rather than solely in the FTSE Small Cap Index) so would also see a boost from a healthy FTSE 250 Index.
For example, Henderson Smaller Cos had 60 per cent of its portfolio in FTSE 250 companies while 54 per cent of Montanaro UK Smaller’s holdings were in companies listed on the index.
According to the report, this weighting partly reflected managers retaining former small cap companies which have since grown into FTSE 250 companies alongside the fact many managers disregarded the FTSE cap cut-off levels when deciding which firms to invest in.
Mr Scouller said his preferred growth trusts for those banking on a Brexit deal at the end of October included Henderson Smaller and BlackRock Throgmorton.
For a focus on value stocks, Mr Scouller backed Aberforth Smaller while Mercantile was the chosen fund on a discount basis.
Paul Stocks, director at Dobson & Hodge, said: "In discussing the anticipated impact of Brexit with clients, I stress that there’s significant uncertainty, investment wise, given that sentiment plays a large part in valuations and there will also be both the economic impact on both companies and Sterling to consider.
"Assuming a deal is struck, it could be perceived that smaller more domestic facing businesses are likely to be more relieved as, I would suspect, they are more likely to be adversely affected from the potential implications of a no-deal Brexit should there be a domestic shock to the economy."
Francis Klonowski, an adviser at Klonowski & Co, said he "simply did not know" what would happen to individual trusts on the basis of a Brexit concluding.
He added investors should always want a variety of companies within their portfolio in order to diversify against external events, such as Brexit.
imogen.tew@ft.com
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