Views and Analysis

Brexit - The Black Swan Returns

Ken Nicholson and Trevor Fitzgerald comments on Brexit vote

Running through Hyde park earlier this week, I was surprised to see an old friend return: amongst the 50 or so white swans was a single black swan on the Serpentine lake. Call me superstitious but this proved to an omen for what is looking to be a Brexit driven black Friday in equity markets. Interestingly the last time I saw my feathered friend was January for the oil crisis correction at the start of the year.

Heading into the UK Brexit referendum vote we saw high market volatility with regular days +/-1-2% as the polls flip flopped. The vote for Brexit has seen George Soros’ warning proven right with a Black Friday event today. This can make managing your money challenging but we would like to assure you that we have taken extensive preparation and diligence in constructing the portfolio to perform in either scenario - we stick to stock picking rather than political forecasting.

We build a well diversified portfolio that seeks to win in all weathers through single stock picking. We seek good global prospects that can grow irrespective of the economic outlook of a single geography such as the UK. We carry out extensive due diligence on balance sheets and liquidity to avoid financial stress. We also have a well diversified portfolio by sector and geography to avoid crowding and high correlation.

We avoid complicated and expensive insurance like derivatives that we rarely see working through times of extreme volatility and see the best insurance as high liquidity, that can appear as a high cash balance. We agree with Keynes that the market can stay irrational longer than you can stay solvent so we approach the problem with cash flexibility to take advantage of any opportunities that may arise and are able to fund redemptions out of cash rather than having to sell our holdings at times of market stress. This is not a call on the market but a means of keeping flexibility.

The markets have always been volatile and today is no exception but, similar to the oil crisis earlier this year, the China slowdown last summer, Euro crisis 2012 and US government shutdown in 2011, these events should be expected and contingencies made. We continually review macro risk but we build our portfolio with bottom up hidden champions who have survived far worse in their long histories, so we are confident that we will emerge stronger through any black swan moments like Brexit.