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Markets Skid on Brexit: 3 European Mutual Funds to Suffer

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U.K.’s referendum results in favor of a “Brexit” came as a rude shock to global financial markets when most of the recent polls were pointing to a “Bremain”. Like the stock markets, mutual funds having significant exposure to securities issued in Britain are also likely be impacted by this historical result.

Detailed Result of the Referendum

Results from the referendum showed that 52% or 17.41 million of the voters supported a Brexit. While the majority of voters (53%) from England and Wales supported Britain’s exit, most of the voters from Scotland (62%) and North Ireland (56%) cast their votes against it.

Also, out of the 382 councils that took part in the referendum, 257 favored a Brexit. While most of the voters from the 116 councils cast their votes against Brexit, results from nine councils showed that both sides got an equal number of votes. According to U.K. Press Association data, 72.1% of the voters from East London and Essex favored Brexit, while voters from Wandsworth, the City of London and Islington wanted Britain to remain in the EU, with 75% of them voting in favor of Bremain.     

Reactions From Leaders of Both Sides  

Following the Brexit, British Prime Minister David Cameron, who had requested the British population to vote in favor of remaining, announced that he will leave the post by October. Cameron said: "The British people have voted to leave the European Union and their will must be respected... The will of the British people is an instruction that must be delivered." He added: “the British people have made a very clear decision to take a different path and as such I think the country requires fresh leadership to take it in this direction.”

The leader of the U.K. Independence Party (UKIP), Nigel Farage, who was an active leader in the Brexit campaign, welcomed the result and said: “Today, the sun has risen on an independent Britain.” He also said: “We need the negotiations to start as soon as humanly possible, we need to start thinking globally about our future, and the other thing I think that needs to happen is that June 23 needs to become a national bank holiday and we will call it independence day.”

Initial Brexit Impact

Brexit hit hard the global financial markets, with the major benchmarks avalanching on the news. Stocks in London, Germany, Frankfurt and Paris lost nearly 16%, 8%, 10% and 8%, respectively. Meanwhile, the Nikkei declined around 8%, witnessing the largest one-day fall in the last 16 years. Also, the Dow futures declined nearly 500 points following a rise in uncertainty.

Separately, the British currency sterling declined nearly 10% against the U.S. dollar to touch the lowest level since 1985. The euro also saw a sharp decline of around 4% against the dollar. On the other hand, a safe haven appeal helped the Japanese currency yen to jump against the dollar to reach the highest level since Nov 2013.

Moreover, Brexit had a negative impact on oil prices with WTI and Brent crude declining nearly 5%. Investors are pulling out their assets from stocks to reallocate them in safer securities in order to protect their portfolios from uncertainty that arose following Brexit. A surge in the price of the 10-year German government bond led the yield on the same to move deeper into the negative territory to an all-time low. Also, U.S. 10-year Treasury futures gained nearly 2%, indicating a rise in investor worry.

3 European Mutual Funds to Dump

Investors are speculating that Brexit might have a negative impact on Britain’s economy and may affect the stability of British pound. As the supporters of Bremain argued, Britain’s exit may have a huge impact on the country’s trade, which in turn will affect the economy.

Brexit may lead to an increase in tariffs between the EU and UK and may in turn have a negative impact on the country’s trade. They also speculated that Britain’s trade may be affected by a global economic slowdown in the post-Brexit period as half of all of Britain’s trade is with the EU. While EU has a share of nearly half of the country’s exports, the volume of Britain’s imports from the EU exceeds its exports.

Against this backdrop, dropping of European mutual funds that have significant exposure to British securities along with an unfavorable Zacks Rank would safeguard a portfolio from Brexit-led uncertainties. We have highlighted three European mutual funds that have more than 30% exposure in British securities and carry either a Zacks Mutual Fund Rank #4 (Sell) or #5 (Strong Sell).

These funds also have a three-year Sharpe ratio – an important indicator of risk-adjusted return – of less than 1. A ratio of 1 or higher is considered beneficial for investors, while a value lower than 1 means that investors are receiving substantially low returns.

Henderson European Focus A (HFEAX - Free Report) invests the lion’s share of its assets in equity securities, which include common and preferred stocks, of companies located in Europe. It currently allocates more than 37.1% of its assets in securities from the UK. The fund lost 2.1% and 13.5% in the year-to-date and past one-year period, respectively. Also, the fund currently has a three-year Sharpe ratio of 0.55. Henderson European Focus A carries aZacks Mutual Fund Rank #5.

Ivy European Opportunities A invests s large chunk of its assets in equity securities of companies located in developed European nations. It currently allocates more than 31.4% of its assets in securities from the UK. The fund lost 4.9% and 12.4% in the year-to-date and past one-year period, respectively, and has a three-year Sharpe ratio of 0.31 currently.Ivy European Opportunities A carries a Zacks Mutual Fund Rank #5.

Columbia European Equity A generally invests in securities from developed European nations and may also invest, to a lesser extent, in companies located in developing and emerging European economies. It currently allocates more than 31.1% of its assets in securities from the UK. The fund lost 3.2% and 10.4% in the year-to-date and past one-year period, respectively. Also, the fund, which carries a Zacks Mutual Fund Rank #4, has a three-year Sharpe ratio of 0.19.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank at https://www.zacks.com/funds.

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