We like to buy when others panic. Unfortunately, while there has been lots of noise and volatility around Britain’s vote to exit the European Union, the market response has been orderly and appropriate so far.
Lloyds Bank is one of our larger holdings in the International Fund. It got whacked 20% on Friday, and the pound was 8% weaker versus the US dollar, so the impact on the fund was worse than that. The UK economy is likely – or certain if someone doesn’t come out with a plan soon – to enter recession, and that is never good news for a bank. Lloyds’ loan book is also heavily weighted towards residential housing, so it is exposed to a fall in property prices. It’s well capitalised and unlikely to become distressed, but a 20% selloff looks roughly sensible to me.
The International Fund also has a small holding in real estate agent Countrywide Plc, which also saw its shares down some 20%. The mechanism is less clear here. Revenue is a function of house prices and selling volume, so any rush for the exits might be a good thing in the short-term, but the business is clearly exposed to elevated house prices. We added a little to our holding as 20% looks extreme, but it’s at the extreme end of sensible rather than an irrational response.
Rolls Royce saw its shares trade up on Friday. It incurs expenses in the UK and generates mostly US-dollar revenue, so the weakening Pound is likely to be something of a windfall for the company.
Outside the UK, there is less of a rationale for a selloff but mostly we saw 3-4% declines for the stocks we are interested in. It added up to a rough day for the portfolio, down more than 4% on the day, but on an individual stock basis we need more than 4% to get us interested.
We will see how things unfold over the next few weeks. But, all in all, I’d say it has been a mostly rational response.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.