La Financière de la Cité has launched an equity fund aiming to benefit from the new market environment created by the Brexit. Below, Adrien Paredes-Vanheule, of International Investment‘s sister publication, InvestmentEurope, catches up with the new Brexit fund’s manager, Bruno Demontrond (pictured above).
The pragmatism usually associated with Anglo-Saxon culture has been latched onto by the Paris-based investment boutique, La Financière de la Cité, which revealed its pragmatic side at the end of December, when it launched its FDC Brexit fund.
As the first strategy specifically designed to take advantage of Brexit, and the market environment that will be created by the UK’s withdrawal from the EU, it aims to invest primarily in UK, Swiss and Scandinavian equities.
“Since Britain voted to leave the EU in June 2016, we have identified a risk of instability in the eurozone,” explains fund manager Bruno Demontrond.
“Therefore, the strategy’s approach relies much on risk management.
“The gist was to launch a strategy that does not invest at all in the eurozone, in order to diversify risk in client portfolios.”
The fund also provides diversification at a currency level by not being invested in euros. It is the firm’s belief that sterling, as well as the Swiss franc, will appreciate against the euro, hence the fund does not need to be currency hedged.
Financial sector trigger
The FDC Brexit portfolio consists of 40 stocks, of which 85% are UK and Swiss equities. Large cap stocks form around 70% of the fund. As of 21 March, some 29.79% of the portfolio was allocated to industrials, followed by healthcare (16.19%) and discretionary consumption (14.30%). The manager says he has taken the bet of not holding financial stocks.
“We have chosen to leave financials aside from our stock selection, as in our risk management approach, we believe a potential eurozone crisis could be triggered in the financial sector,” he explains.
“Also, the industrial sector has enough weight in the British economy, and has strong investment capabilities. The UK significantly resembles Switzerland.”
An example of what the manager sees as a strong UK industrial stock is Smiths Group, which was the fund’s largest holding as of 21 March.
“Smiths Group develops itself in two sectors: oil and healthcare,” says Demontrond.
“The former sector benefits from a cyclical trend while the latter is linked to long-term trends such as ageing.
“We are looking for stocks like Smiths Group, that have robust balance sheets, are able to deliver free cashflow and some dividends.”
Demontrond says he feels confident about the impact of Brexit on UK equities, as he says Europe’s trading is at stake in any deal with the European Union.
“We have to see the Brexit picture over the long term. I suspect the negotiations will not start before the last quarter of 2017, once the series of elections held across Europe ends.
“We have to bear in mind that Germany’s first trading client remains the UK. Germany has no interest in ‘killing’ its main client. All official statements suggesting that Britain would eventually be punished are no more than political views to calm public opinion, and limit the risk Brexit could spread to other EU members.
“I do not believe officials will act as they said. And the UK needs Europe anyway.”
Some observers have pointed out the UK could become a tax haven for companies if it makes good on threats to lower corporate taxes. Demontrond, however, says the country will not need to lower its tax rates to be attractive.
In addition, he points out that the UK’s corporate taxes are already low, and that, if it were to lower taxes, the country would have to seek out financial support elsewhere for the country to function.
Could the UK draw major companies based in Ireland ?
“Ireland has been a strong player for 15 years, [thanks in part to its] low corporate taxes. Most US companies have their European headquarters there, and Ireland remains an entry door to the eurozone,” the fund manager says.
La Financière de la Cité could market the FDC Brexit fund in other European countries over the mid term. In the meantime, Demontrond expects further fund launches related to the Brexit theme, and reckons being a pioneer gives an edge to the French boutique.
This feature was first published in the March 2017 issue of InvestmentEurope.