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This is a financial promotion for First State Diversified Growth Fund for professional clients only in the EEA and elsewhere where lawful. Investing involves certain risks including:

The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.

  • Currency risk: changes in exchange rates will affect the value of assets which are denominated in other currencies.
  • Emerging market risk: emerging markets may not provide the same level of investor protection as a developed market; they may involve a higher risk than investing in developed markets.
  • Derivative risk: the use of derivatives may result in large price fluctuations and gains or losses that are greater than an investment in the underlying asset.
  • Credit risk: the issuers of bonds or similar investments may not pay income or repay capital when due.
  • Interest rate risk: interest rates affect the value of investments; if rates go up, the value of investments fall and vice versa.

Reference to specific securities or companies (if any) are included to explain the investment strategy and should not be construed as investment advice, or a recommendation to invest in any of those companies.

For a full description of the terms of investment and the risks please see the prospectus and Key Investor Information Document.

If you are in any doubt as to the suitability of our funds for your investment needs, please seek investment advice.

Expecting the unexpected - Brexit

This is article 5 of our 5-part ‘Expecting the Unexpected’ series. If you enjoy reading this article, don't miss the other four in the series by clicking the links on the right hand side of this page.

• Brexit: an unexpected headwind for markets, particularly in UK domestic stocks

• Sterling drops 10% following the vote two years ago and doesn’t recover

• Lesson learned: diversify portfolio to prepare for further falls in Sterling

The Brexit debate has certainly earned the rare privilege of firing-up British emotion: polarising electorates and government cabinets and turning updates on Brexit negotiations into a weekly soap. 

Emotions to one side, it has also had serious ramifications for the UK economy and financial markets. Andrew Harman of the First State Diversified Growth Fund is aware of the risks the impending spectacle will bring and is preparing the portfolio, as far as possible, in order to be able to preserve it against loss of capital - an equally important objective to capital growth for our investors.

The referendum to decide ‘Brexit’ – a tabloid expression now firmly embedded in the British vernacular – happened on 23 June 2016. The next day the pound sold-off 10%. The FTSE-100 dropped likewise in the first few minutes of trading. The initial shock, considering it was a largely unexpected result, caused investors to baulk at the newfound uncertainties around future trade and the stability of the incoming government.

But it wasn’t all bad. While UK domestic stocks were being hammered on the Soothsayer’s predictions of impacted growth and business confidence, international businesses were seeing a boost to their overseas earnings, and fared much better. In the FTSE-100 around 70% of its collective earnings are overseas, seeing it tending to rise and fall in lockstep with the pound. In a similar vein, Britain’s businesses became sudden sale items, attracting a wave of Mergers & Acquisitions.

Time rolled on as the new government set to work. The opaque cloud of Brexit negotiations and minefield Brexit planning meant most companies fell silent for the next two years. But as the cliff-edge approaches the nausea attached to the lack of clarity is more recently forcing them into the open to berate the government more publicly.

Theresa May’s recent high stakes summit at her country residence Chequers has attempted to provide some clarity and ended with (most of) the cabinet in agreement with a ‘Soft Brexit’ proposal: alignment in areas such as goods, customs, and law, with greater flexibility in the movement of people, in setting trade tariffs, and regulation around services. No deal or ‘Hard Brexit’ seems to be an outcome the government is avoiding, leaving the more hard-line Brexiteers found wanting. With negotiations and interpretations still fluid, details on the UK’s position for Brexit will likely remain a moving target.

Try our DGF Navigator for a transparent view of our asset allocation decisions since the launch of our Fund.

But what does this mean for our investors? The economic impact is likely hard to predict, but the damage to the pound is maybe more so: in the case of a hard Brexit it could be substantial. This would push up inflation and lower purchasing power, and likely lead to the Bank of England applying the brakes on inflation (and the economy) through raising interest rates.

By stress testing the hard Brexit scenario we believe we have prepared the portfolio, investing in assets to protect against UK inflation as well as using our ability to diversify across the globe and invest overseas. To offset potential spikes in UK inflation we have taken positions in inflation-linked short-dated gilts, where our neutral asset allocation (NAA) is 15%. 

To offset potential falls in the pound we have positions in Euros, US Dollars, and other developed market currencies, as well as in emerging currencies such as Turkish Lira. We have also diversified away from positions in UK equities, currently at 7%, to allocate 28% to global equities. Similarly, in government bonds our overseas allocation is 25%, and in credit it’s 10% (as at end of May).

Through stress testing we believe we can better prepare for the unexpected: using times where assets have been impacted by certain market events, we can learn from history to avoid the pitfalls that could potentially besiege the portfolio in the future, enabling us to meet our twin objectives of RPI +4% gross over a rolling 5 year period and capital preservation over the short term.

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See our full list of ‘Expecting the Unexpected’ articles below:


Important Information

This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy, or completeness of the information. We do not accept any liability whatsoever for any loss arising directly or indirectly from any use of this information.

References to “we” or “us” are references to First State Investments.

In the UK, issued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743. Outside the UK within the EEA, this document is issued by First State Investments International Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registered number 122512). Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB number SCO79063.

Certain funds referred to in this document are identified as sub-funds of First State Investments ICVC, an open ended investment company registered in England and Wales (“OEIC”). Further information is contained in the Prospectus and Key Investor Information Documents of the OEIC which are available free of charge by writing to: Client Services, First State Investments (UK) Limited, Finsbury Circus House, Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting www.firststateinvestments.com. Telephone calls may be recorded. The distribution or purchase of shares in the funds, or entering into an investment agreement with First State Investments may be restricted in certain jurisdictions.

Representative and Paying Agent in Switzerland: The representative and paying agent in Switzerland is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. Place where the relevant documentation may be obtained: The prospectus, key investor information documents (KIIDs), the instrument of incorporation as well as the annual and semi-annual reports may be obtained free of charge from the representative in Switzerland.

First State Investments (UK) Limited and First State Investments International Limited are part of Colonial First State Asset Management (“CFSGAM”) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments elsewhere. The Commonwealth Bank of Australia (“Bank”) and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of the Bank or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

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