The Investor 90

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THE INVESTOR CENTRE
OLDFIELD PARTNERS
High Octane
International scope of holdings
should protect against UK falls
Weaker UKeconomy
and eurozone fragility
a er Brexit
MIDOCEAN
Joint manager: Strategic Income
Opportunity to purchase attractively
priced stocks due to market volatility
Referendumresult
may raise questions
over future of EU
ORCHARD STREET
Property
Portfolio is well placed to weather
any potential downturns
Brexit vote introduces
uncertainties into
investmentmarkets
Jim Wiant and Michael Apfel
T he recent Brexit vote introduces
uncertainties into all investment
markets and property is no exception.
That said,theUKcommercial property
sector has positive characteristics as we
enter the post-Brexit era.
It provides a stable income stream
yield, driven by underlying long-term
leases.The income yield remains at
close to a historic-high premium to
long-termUK gilts.The market is not
oversupplied.The market is not
over-leveraged – since the nancial
crisis of 2008, lending to the sector has
beenmore conservative,which has led
to a well-capitalisedmarket, better
capable of weathering a downturn.The
St. James’s Place Property fund has no
borrowing whatsoever.Assuming
Brexit does not, of itself, cause
unprecedented tenant bankruptcies, it
is likely that property investors will
continue to receive a stable income
stream even if capital values come
under pressure in the short term.
The St. James’s Place Property fund
has a low vacancy rate and is invested
in prime stock,well placed to capture
any rental growth.The sector should
continue to o er an attractive
long-term investment option as part
of a diversi ed multi-asset portfolio.
Until the Brexit vote, risk assets led
by the US high-yield market
extended their strong rally which
began in mid-February.The US high-
yield index was up approximately 9%
for the year, outpacing most risk
assets.The sectors that su ered the
most in 2015,metals and mining and
energy,were up a surprising 27% and
22% year-to-date as commodity prices
bouncedmaterially o their lows.
Accommodative central bank
policies and modest but stable US
economic data provided an attractive
backdrop for high-yield
bene ted from positive in ows and
issuance hit highs not seen since 2013.
Yet, as a result of the vote for Brexit,
risk assets sold o across the globe.
The consequences of the referendum
remain unclear and may raise broader
questions over the longer-term
viability of the EU and global
economic believe the
implications for US high-yield are
fewer and likely limited to companies
with signi cant revenue exposure to
the UK or the rest of Europe.
We plan to take advantage of the
market sell-o to purchase positions at
more attractive risk-adjusted levels.
T he quarter ended with a real
shock.When the referendum polls
closed at 10pm,sterling stood at $1.50.
Six hours later it had fallen to $1.34.
The two most likely repercussions of
the referendum are a weaker UK
economy and new concerns about
eurozone fragility.Our holdings in
continental Europe are , the
German utility; Eni, the Italian energy
company; and BBVA, the Spanish
bank. BBVA is the company with most
potential to be a ected, though the
valuation underrates the thriving
Mexican banking subsidiary.
In the UK, our holdings are Rio
Tinto, BP andTesco. In a review in
which we considered in advance the
possible impact of Brexit,we
concluded that the rst two of these
are about as international as one can
imagine, in uenced by the global
economy rather than particularly by
the UK or even European economies.
Despite pollsters, political events,
like economic ones, are hard to
forecast. So we hang our hat instead on
the valuations of individual companies
which are essentially sound.Currently,
particularly after the recent falls, the
valuations of the companies we hold
are very low,giving us signi cant upside.
Richard Oldfield Philip Gadsden
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