Top ten funds to profit from a Boris Brexit bounce

City analysts are pondering a once-unthinkable scenario: what if it all goes right for Boris Johnson? David Stevenson picks the funds he thinks will perform the best from a Brexit bounce.

Boris Johnson stuck on a zip-line © Barcroft Media / Barcroft Media via Getty Images

What if we get a Brexit deal and Boris Johnson also wins the ensuing (or preceding) general election? There are many hurdles still to clear (see page 8). But among the dozens of institutional investors I've seen in the last few weeks, I'd estimate that the odds of the "triple-B" scenario the "Boris Brexit bounce" have risen from well below 25% to between 25% and 50%. So it's far from certain but not beyond the realms of possibility. And if it does happen, the argument goes, then after years of negative sentiment towards UK equities, investors have to be prepared for a rebound.

Preparing for "the triple-B"

What would drive this rally? The obvious catalyst will be that businesses (and investors) who have delayed decision making amid political uncertainty will finally jump off the fence particularly if an election is won by the Conservatives, removing Labour leader Jeremy Corbyn as a source of concern. At that point, the UK equity market could be a major beneficiary.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The reality is that foreign direct investment into the UK hasn't been hit that badly in many sectors, especially as sterling has weakened, making UK assets cheap. Foreign investment in property, for instance, has been pronounced as has private-equity merger and acquisition activity. However, liquid public markets such as our stockmarkets have been hit much harder, precisely because stocks are so easy to buy and sell. As a result, UK equities have been ignored in favour of US stocks in particular. But if sentiment turns sharply, that liquidity could turn from a hindrance to a help it's easy to buy into UK equities, so they would likely be among the first assets to gain.

So, if you want to bet on the "BBB", what's the best option in terms of funds? First, focus on the more domestically orientated areas mid-caps (the FTSE 250) and small caps (the FTSE small cap and Aim). These indices are much more UK-centric than the FTSE 100 (although even the FTSE 250 has plenty of fast-growing international stocks). You might also focus on "value" (cheaper stocks in unloved sectors), where the impact of an economic slump is felt most.

Advertisement - Article continues below

In terms of fund structure, there are some FTSE 250 index trackers, but they aren't huge, and access to UK small caps via index trackers is next to non-existent. So investment trusts are a much better bet.

The top Brexit-bounce trusts

So which funds might do best? Well, in early October we saw a strong Brexit bounce as investors started to hope for an end to the first phase of Brexit. This bounce showed up most strongly in specific funds. Investment trust analyst Simon Elliott and his team at Winterflood ran the numbers on the trusts that did best in this dry run for a BBB scenario. The FTSE 250 bounced by just under 5%, but a handful of funds strongly outperformed Mercantile (LSE: MRC), Fidelity Special Values (LSE: FSV), Schroder UK Mid Cap (LSE: SCP), JP Morgan Mid Cap (LSE: JMF) and Temple Bar (LSE: TMPL). That's not a bad shortlist of trusts likely to do well in a BBB scenario.

Alan Brierley at Canaccord Genuity echoes this observation he likes Mercantile (trading at a 5.4% discount), as well as Aberforth Smaller Companies (LSE: ASL), which "is currently the cheapest it's been for several years at the current price and discount you're almost getting a double discount". The fund trades at a 10% discount, while many of the stocks in the portfolio also trade on record-low valuations. Brierley also commends BlackRock Smaller Companies (LSE: BRSC) for investors after more growth-orientated smaller businesses.

Elliott, meanwhile, also highlights funds, including Aurora (LSE: ARR) (full disclosure I am a non-executive director on this trust), Aberdeen Standard UK Equity Income (LSE: ASEI), and Lowland (LSE: LWI).



Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020

Brexit begins: what do the UK and the EU want from a trade deal?

With Brexit now done, the trade talks can begin. But who wants what from a UK/EU trade deal, and how likely are they to get it?
3 Feb 2020

Most Popular


What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Coronavirus: what it means for your mortgage or your rent

Ruth Jackson-Kirby looks at all the key questions for owners, renters and landlords affected by the coronavirus crisis.
29 Mar 2020
UK Economy

The UK’s bailout of the self employed comes with a hidden catch

The chancellor’s £6.5bn bailout of the self employed is welcome. But it has hidden benefits for the taxman, says Merryn Somerset Webb.
27 Mar 2020
UK Economy

Debt jubilee: will our debts be written off?

The idea of a "debt jubilee" – general society-wide cancellation of debt – goes back to Biblical times. Could it happen again? And would it really do …
28 Mar 2020