Brexit is the main topic of conversations when watching the news or reading the papers, but one question our client’s ask us on a daily basis is “How will Brexit impact on my pension”?
The answer to the above question depends on what type of investments you are holding in your pension.
Many people’s workplace and personal pensions have assets invested in the companies that are from the FTSE 100. Although UK based companies, they are multinational in their operations and have much of their earnings from overseas, in multiple currencies, which means the major issue they face is from fluctuations in the value of Sterling.
When the country voted for Brexit back in 2016, the £ immediately fell, and you may have noticed foreign holidays becoming more expensive. This fall in the £ caused the FTSE 100 index to rise. Why? Because those foreign earnings were now worth more for the multinational companies and so UK investors in FTSE 100 companies made gains purely based on the fall in the £.
How are Pensions Managed?
Many pensions are managed by ‘Active’ fund managers, which means they freely move in and out of different assets depending on factors including the economy. These same Active Managers hawkishly watched the economic issues around Brexit and positioned their investment portfolios accordingly. They could take advantage of short term market falls to buy assets more cheaply, then hold them with a view to selling when values have risen; with a view to making a gain for your pension fund.
‘Passive’ or ‘Tracker’ funds within pensions, whilst popular because of their perceived lower cost, may be harder hit through these more volatile economic and market conditions. This is because they simply follow an index (such as the FTSE 100) and have no experienced fund manager making changes because of what’s going on in the world.
John Husselbee, Head of Multi Asset at Liontrust Assett Management, who oversees over £100 Million of client’s hard earned investments, gives his comments on Brexit.
Our multi-asset approach at Liontrust is grounded on the idea of long-term patient investing, ignoring short-term market noise as far as possible. This has clearly become increasingly difficult when it comes to Brexit, and with the issue set to dominate the news as the clock ticks down to the UK’s scheduled ‘leaving date’ on 29 March, investors are understandably concerned.
Without wanting to downplay the situation, market historians tell that us that politics rarely has a long-term effect on investment performance. We would also stress the fact that our portfolios – and many others – are globally diversified and not dependent on the success (or otherwise) of the UK economy. We are more tied into the global economy, of which the UK accounts for just over 3% (and around 6.5% of the global stock market), so Brexit – however it plays out – is unlikely to be a significant driver.
While keeping all this in mind, what can we say about Brexit two and a half years after the referendum? As things stand, the situation appears to have settled into an impasse: Theresa May survived a vote of no confidence but has not managed to get her deal through parliament, and the EU seems unwilling to grant any concessions.
We are now in a position where even the one ‘certainty’ that the UK would leave the EU on 29 March 2019 is no longer definite and all possibilities – including no deal, May’s deal, extending the deadline, a “people’s vote” and not leaving at all – appear possible. The weeks leading up to the scheduled exit date are likely to be interesting to say the least.
A harder Brexit scenario would lead to weaker sterling, softer gilt yields and a better environment for larger companies over smaller businesses – which is broadly what happened in the aftermath of the referendum in June 2016. A softer Brexit would broadly have the opposite effect but, unlike the original vote, the situation is anything but binary.
Whatever happens over the next few months, making snap investment decisions based on politics has rarely proved a successful strategy. The evidence of history points to the importance of investing for the long term and staying in the market through the ups and downs, and this remains the case whether we get a soft Brexit.