Before tackling the subject matter related to the title of this briefing, we wanted to share some good news and let you know that we’ve recently been included in the latest Financial Times Private Client Wealth Management Survey. This is the fifth year in a row we’ve been included and once again we think we come out very well.

Of all the firms featured, our balanced portfolio was in the top five performers over all timescales. To read more and to see our results, click here.

Property Update

No doubt you will have seen headlines during the last week about several commercial property funds suspending dealing.

This includes several of the funds we held in our ideal portfolios until the day after the EU referendum when we sold all property holdings.

Several funds have since either closed their doors or applied big “fair value adjustments” to their prices. In the case of the Aberdeen UK Property fund this worked out as a 17% drop.

As we always stress, property can be an illiquid asset class and if funds have to sell buildings to meet outflows, this can take some time. It is a sensible precaution for them to close their doors to redemptions on a temporary basis, meaning they can sell down properties over time and avoid having to do so at firesale prices. This approach is designed to protect those who choose to remain in the fund.

The “fair value adjustments” are an unusual step. In essence, they are applied because nobody is quite sure what the properties held in the funds are worth any more. It could be that many of them are worth just as much as they were before the referendum. However, some property prices could slip substantially. For example, we would be most worried about City of London offices let to financial institutions.

Because there have been only a few transactions in the short time since the vote, there is little evidence on which to base property valuations. As a result, funds have applied a blanket write down on their property portfolios, which again is to protect investors who remain in the fund. If they did not do so, there is a chance that those selling could receive more than they should, based on buildings which might be worth less than their previous “book value”.

The funds will continue to review both liquidity and these adjustments once the picture becomes clearer.

In June last year, property represented around 28% of a balanced portfolio and, in total, our clients held circa £130 million across several funds. Since then, we have gradually reduced holdings and just prior to the referendum, a balanced portfolio had only 12%.

Most clients now hold nothing in commercial property but some may retain some small holdings. This is because if there is a pending purchase or sale of a fund within an account, we are unable to place any other deals on that fund in the same account until that trade has settled. Clients who were in the process of making contributions or withdrawals at the time of the referendum may therefore still have some small holdings in property funds.

If this is the case, we will discuss this with you separately. I must stress that this is generally a very small part of portfolios. For example, the total property held across all clients is now around £600,000 compared to £130 million a year ago.

Other asset classes

All portfolios continue to hold more cash than usual.

If you were to simply look at the performance of the FTSE 100 which is up 3.1% since referendum day (23 June to 7 July) you might be wondering why we are being so cautious? Looking at this index alone you would think that everything is fine.

However, the FTSE 100 is not a great indicator of the UK economy, with around 80% of earnings coming from overseas. Since the referendum result, the pound is down 12.7% against the US Dollar, meaning profits of the top 100 companies have essentially increased by about 10% purely as a result of currency movements. In that context, the fact that the FTSE 100 is only up 3.1% since 23 June shows that investors are not expecting that profit boost to be permanent

By contrast, the more UK centric FTSE 250 index is down by 8.3% since the day prior to the referendum result.

For a more representative indicator of how market participants see Brexit affecting the economy, perhaps we would be better to look at the perceived ‘safe-haven’ gilt market. Prices have risen sharply, pushing the yield on 10 year gilts down from around 1.5% before the referendum to around 0.77% on 5 July. Bond investors are gloomy about the economic outlook and now expect the Bank of England to drop interest rates to 0.25% with a view to not increasing them again for at least four years.

Despite the uncertain outlook, we still believe there are opportunities which will arise. For example, some of the money we raised from sales was used to purchase an index linked gilt fund after the referendum, which at the time of writing is up 2.83% since we bought it (28 June to 7 July 2016). We are also currently in the process of making a further top up to fixed interest and to alternative equity, where we believe funds can take advantage of currency movements and changes to central bank policy.

However, we will remain cautious and hold more cash than usual until the picture becomes clear, or until further opportunities arise.