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Investors need to keep a close eye on the exposure of UK funds to smaller companies to avoid being caught out by a Brexit-induced liquidity shock, according to James Burns, co-head of the Smith & Williamson Managed Portfolio Service.

According to Burns, Brexit represents a real risk to the liquidity of smaller companies in the UK, with just a few weeks to go before the current exit date.

“We are conscious of liquidity in markets, and as we get more newsflow regarding Brexit in the final few weeks before the deadline, any indication that the deal is going to be worse than expected could hurt,” he says. “We therefore don’t want to own anything where liquidity could be an issue, so we’ve sold some of our exposure to UK smaller companies.”

Burns thinks liquidity management should now be seen as the key concern for investors, with the risk of a liquidity event in parts of the market growing as the deadline nears.

“We don’t want to have a fund that, for whatever reason we get a bad Brexit, subsequently gets hurt more because of its small cap exposure,” Burns adds.

Instead of smaller companies, Burns has tilted his Smith & Williamson portfolio into areas with better liquidity profiles.

For Burns, liquidity is absolutely key to both managing clients’ money and an important facet of prudent portfolio management, and as a result he says he is happy to pay the premium that sometimes comes along with such a profile at this juncture.

“If we get a positive outcome to Brexit we would look to go back to some of these positions, but for now it makes sense to improve the underlying liquidity of the portfolio,” Burns adds.

To reduce exposure to UK smaller companies, Burns has reduced his exposure to Miton UK Multi-Cap Income, which has a long list of small cap names, reinvesting the proceeds into MAN GLG Undervalued Assets and RWC Enhanced Income.

He continues to opt for a blend between growth and value at this stage of the cycle, with the long-awaited return to form of value yet to fully materialise.

Burns thinks the Brexit-related changes he has made have not impacted the portfolio shape much – he still likes the UK market, and has kept the money in the same bucket, but just with an enhanced liquidity profile.

Further analysis from The Armchair Trader:

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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