The world does not come to an end with a Brexit but is has become more risky


Fund Commentary
19 Jul 2016


After the long wait throughout the entire month of June, the UK voted with a majority of roughly 52% to 48% to leave the EU. The UK and Europe now enter a period of elevated risks.

Beyond the immediate economic damage as uncertainty weighs on investment, political risks now loom larger than before as the UK’s vote to leave pushes the EU into a serious identity crisis with significant risk of contagion.

The Brexit decision came as somewhat of a shock to markets, which had largely priced out the risk until the day of the referendum and sent financial markets into a downward spiral in the last week of the quarter. The EuroStoxx 600 Net Return ended the month with a negative return: -4.83% pushing year to date performance to -8.81%.

In that context, the Fund managed to outperform with a –4.07% return in May, outperforming its benchmark by 0.76% for the month. Year to date, the Fund’s performance stands at –2.92%, translating into a 5.89% outperformance versus its benchmark index.

Kardex was the most significant contributor, followed, this month, by Trigano and GfK. At the other end of the spectrum, SAF-Holland, Lisi and Mersen were the three main detractors. The portfolio remained unchanged during the period under review in terms of number of constituents. The investment in Fermentalg was sold off during the month and a new position was initiated in Trigano.

It is still too early to judge if we are jumping into the unknown or not. Policy makers and central banks have discussed the threat of Brexit for the last six months and have to present a credible response to try and stabilise the European economy. The world does not come to an end with a Brexit but it has definitely become more risky. As mentioned in the previous letter, with capital preservation in mind, the Investment Adviser decided to increase the cash allocation of the portfolio from 5% to approximately 15-20%. More cushion for investment needs to be taken into account until we obtain more evidence of the magnitude of the slowdown of the economy in Europe.

It is important to remember that the Fund has no exposure at all to financial companies, no direct exposure to the UK and very limited indirect exposure through the Fund’s investments. Since early July, the Italian NPLs risk took another dimension and made the front pages of the press. Here as well, the Fund’s exposure to the country remains limited with only approximately 6%, held in two internationally diversified companies, Moncler and Brembo.

The sought after characteristics: pricing power, sound balance sheets, free cash flow generation will be paramount in the months to come.


The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 06/07/16 and are based on internal research and modelling.