Ahead of the Scottish Independence Referendum, wealth managers are divided on whether investors need to take action to protect their portfolios.
Nick Hungerford, the chief executive officer of online investment management service Nutmeg believes two key phenomena will affect portfolios in the event of a Yes vote. First, a Yes vote will lead to weakness in sterling, which will negatively impact returns from assets that are denominated in this currency. Second, an independent Scotland would require operational changes for many UK companies. These, when they occur, will cause a negative productivity shock, with medium-sized firms likely the worst hit.
He recommends investors take three precautionary steps.
1. Move investments in UK medium-sized firms into a US small company fund performing in line with the UK mid-size companies index such as the iShares S&P SmallCap 600 ETF (ISP6).
2. Trim UK large company exposure and consider equity positions unrelated to the UK, such as Japan. [Investors can read recommendations for Japanese investments in this week’s cover story.]
3. Make sure your investments are not ‘hedged’ to sterling. It is commonplace for funds that invest overseas to operate in two classes; hedged and un-hedged.
By contrast, Tom Stevenson, investment director for Fidelity Personal Investing, says: "Unfortunately, many of the outcomes of the referendum are so uncertain that investors will struggle to position themselves effectively ahead of the vote. The outcomes are binary so any positioning that made sense for a Yes vote would probably be wrong in the case of a No victory and vice versa."
Rather than specific portfolio positioning, he recommends investors ensure that their portfolios are well-diversified between asset classes - such as equities, bonds, commodities and cash - and not over-exposed to any part of the market that might be seriously impacted by either possible result.
"It is also worth remembering that the UK's corporate sector is broadly-based with almost two thirds of earnings coming from outside the UK," he says. "Many of the largest companies continue to do well in times of uncertainty, protected from problems on their doorstep by successful operations around the world.
"A fall in the pound might even be good news for some companies. Over the last couple of months, some big companies have been saying the strength of sterling is a problem for them as it inhibits their profits and their ability to pay dividends to shareholders."
