The AXA WF Framlington UK Fund launched in March this year, just as the EU referendum debate hotted up. Chris St. John, the fund's manager, focuses on well-managed companies with growing profits, cash flows and dividends. He has used this approach for many years and did not alter the portfolio materially in the run up to the referendum, or attempt to second-guess the unpredictable binary outcome.
Since the result was announced companies with domestic UK earnings have seen their share prices fall more than those with overseas exposure, particularly those with exposure to the US dollar. This largely explains why the domestic UK exposed FTSE 250 index has performed worse than the FTSE 100.
The sell-off in medium-sized companies has counted against the fund in the short term as it has a bias to this area of the market. Less exposure to large companies, including those selling staple goods and services to consumers, has been negative as these shares have performed better. Should these trends continue in the weeks and months ahead it is likely to prove a headwind for the fund.
While Chris St. John will not change his approach following the referendum result he is mindful of the impact it will have on the UK economy and the businesses he has invested in. A number of changes have been made to the fund since Friday 24th June to reflect this:
- Aldemore, a challenger bank which is exposed to both consumer and business lending in the UK, has been sold.
- Specialist house builder McCarthy and Stone was also sold.
- Exposure to some companies which are more dependent on consumers' confidence in the UK, such as On the Beach Group, has been reduced.
However, in most cases what was deemed a strong business worthy of investment last week, has not become poorly run and an automatic 'sell' this week. Chris St. John has therefore been happy to hold some companies despite significant share price falls.
ITV, for example, has fallen circa 25%, but although a UK recession would impact short term earnings he remains committed to the investment given the balance sheet strength, valuation, prospects, and management focus on shareholder returns. Similarly, Marshalls, a manufacturer of landscaping products, has fallen 35% but the manager remains committed given its competitive position, valuation and excellent management.
Stock market volatility could persist for some time as investors digest the impact of the decision to leave the EU. We are encouraged Chris St. John is maintaining his focus on high-quality, growing companies and investing in them for the long-term. He remains pragmatic and will seek opportunities if investors over-react in the coming weeks.
We are positive on the long-term prospects for the UK stock market and we believe any further share price falls could be seen as an opportunity to top up. Of course there is no guarantee and investors could still get back less than they invest. We also retain our faith in Chris St. John and believe he will deliver excellent long-term returns. This fund remains on the Wealth 150+ list of our favourite funds.
Please note the AXA WF Framlington UK Fund is an offshore fund, investors will not be protected by the Financial Services Compensation Scheme.