Two funds we've sold because the pound has strengthened

Amid Brexit fever, the Saltydog analyst thinks one outcome could have serious consequences for UK investors.

A strengthening pound could harm your investments

Last Wednesday the pound was trading at around $1.22. On Friday it briefly went over $1.27, a gain of over 4.1% in a few days. Although it's now dropped back below $1.26, it's quite possible that it could strengthen significantly over the next month, and that could have serious consequences for UK investors.

The first US dollar was printed in 1914, soon after the creation of the Federal Reserve Bank in December 1913. The Federal Reserve then went on to have a key role in funding both the First and the Second World Wars. 

By the end of the Second World War the British Empire was virtually bankrupt, and it wasn't long before the US dollar took over as the world's reserve currency.

At the time the £/$ rate had been pegged by the British government at $4.03. The pound couldn't float freely until the US left the gold standard in 1971, and at that point it was trading at around $2.50.

It briefly dropped below $1.10 in 1985, but then spent most of the next 30 years at, or above, $1.50. And that's where it was on the eve of the EU referendum in 2016.

After the decision to leave the EU it immediately dropped and, since then, has spent most of its time between $1.20 and $1.40. 

When the pound weakens it tends to boost funds with overseas earnings and assets, and also pushes up stock prices here due to the large number of international companies trading on the London Stock Exchange, especially in the FTSE 100 index. This has helped UK investors over the last 18 months. However, the trend has reversed in the last few weeks.

On the 9th August 2019, the pound ended the day at just over $1.20.  It's already strengthened by 4%, but would need to go up by another 20% to get it back to where it was four years ago.

In the next few weeks we could see a significant movement in the strength of sterling. If the UK leaves the EU with a deal it will probably go up. If we leave without a deal, I would expect it to go down, at least in the short term. If we don't leave my guess is that it will also go up.

In our portfolios we have already increased our cash levels and reduced our exposure to funds which would suffer as a result of the pound strengthening. We've sold the Liontrust (was Neptune) Global Alpha fund and the Liontrust SF Absolute Growth fund, both of which have significant holdings overseas, mainly in the US. 

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