The United Kingdom’s decision to leave the European Union has sparked the next major wave of financial market uncertainty. We see the concerns around the future implications of this historic vote igniting primal fears amongst many market participants. These concerns are widespread and relate to areas such as:
– Further EU countries undertaking a similar ‘vote to leave’;
– Disruption of the UK and European financial system from ‘passporting’ changes;
– The EU’s intended negotiation tactics with the UK;
– Flow on effects to the UK, European and global economies;
– Currency volatility and especially GBP weakness.
Clime Report on Brexit

Portfolio Implications

Australian Growth Portfolios
Clime is a value based investor. We have a clear understanding of what we believe a company is worth based on rigorous investment analysis. Our investment approach requires an appropriate ‘margin of safety’ when entering into a position and our team-based approach ensures both discipline and conviction in pursuing those most attractive opportunities.
Concerns around changes to the European Commission’s policies to what has been a ‘single passport’ are not unwarranted. The single passport has been a key driver behind London being the EU’s financial capital where banks, asset managers and other financial services companies operate across the other 27 member states without having to set up local operations. We believe these concerns also create opportunities and have been pursuing selective opportunities in both Henderson (HGG) and QBE Insurance (QBE).
Another area where we see a selective opportunity is in Flight Centre (FLT). There will undoubtedly be some impact on international travel from both corporate and retail customers. The resulting sell-off has pushed the stock to a level where we see compelling value and as a result we’ve been adding to this position.
All of these selective opportunities have been sold down on broader concerns which we believe are overdone. We see value, we apply discipline and rigour in our investment process and we apply this process with conviction.
Clime International Fund
We continue to watch closely how the investment community, the Bank of England and the European Central Bank and political leaders deal with the immediate aftermath of the Brexit vote. This will very likely take some time before investors at home and abroad fully understand the impact of this result on UK businesses and the economy as a whole. We believe this will create a challenging new environment that will weigh on the UK and the EU for the foreseeable future. This new environment will also present compelling investment opportunities.
As a result of the Brexit event being a binary outcome, we did not take a strong view ahead of the vote. The Clime International Fund was positioned well for the ‘leave’ outcome with cash levels around 53%, the majority being held in USD. Brexit volatility has created the opportunity to selectively buy into quality names where the long-term fundamentals are sound. We have been buying names including Aberdeen Asset Management, Microsoft, Cognizant, PayPal and Diageo. In the case of Diageo (owner of global brands like Johnny Walker and Smirnoff Vodka), the dramatic sell-off in the GBP is actually beneficial to the business.
We used this period of ‘primal’ investor uncertainty to increase our position in names like Diageo, American Express and Baidu at levels close to the lows of the year. In all cases we believe these businesses are well positioned for future growth in free cash flow.

Summary

We believe Brexit volatility brings with it selective opportunity. We are utilising the current volatility to add to our most attractive investment opportunities across portfolios.