by Tom Bradley

Wow! For a vote that was expected to be close, the result of the UK’s Brexit referendum has been a jolt to the capital markets. Stock markets are down everywhere, currencies are volatile and headlines are frantic.

Obviously, we’re on high alert. As things develop in the days and weeks to come, we’ll provide further updates, but we can say a few things at this point.

Stating the obvious

It’s complicated. Indeed, it’s always complicated, but all the economic and market dynamics are amped up at times like this. And there are many pieces to the puzzle - currencies, stock prices, bond yields, credit spreads, liquidity and central bank actions. As a result, we have to keep in mind that the quality of information is very low. We shouldn’t read too much into any one pronouncement or price move.

Also, it’s worth pointing out that some of the stock market declines at this point simply represent a retracement of last week’s gains, when Mr. Market clearly thought the ‘Stay’ side was going to win.

Short-term impact

It’s too early to assess what the short-term impact will be on our clients’ portfolios. They will be down today with the stock markets, but there are some buffers built in – i.e. holdings in cash and bonds, and exposure to stronger currencies such as the Yen and U.S. dollar. As I noted above, it’s hard to predict all the interactions.

Medium-term impact

The biggest impact Brexit will have comes from the uncertainty it creates. A few years from now, the UK and Europe will have adapted to their new relationship, as will the rest of the world. But in the meantime, nobody knows how the next two years are going to play out, or who the key players will be.

Long-term impact

Brexit only modestly impacts the long-term value of the companies we own. Some will be negatively affected for sure (the UK and European banks come to mind), but some will be able to take advantage of the dislocation. And we can’t forget, there are many other factors driving asset prices, including the U.S. and Chinese economies, energy prices, demographics and technology adoption.

Unfortunate timing

Nonetheless, the timing of this political change is unfortunate. The UK economy is still fragile and many of the European countries are just starting to grow again. Prior to the vote, it was my view that Europe would be a big part of the world’s economic growth going forward – i.e. the second largest economy in the world starting to grow.

Our managers have been through this before

At Steadyhand, our managers will do most of the navigating through this. At this point, we have no indications of what changes they might make, and we’ll mostly stay out of their way until things settle down a little. All other things being equal (which they’re not ... it’s complicated ...), however, we will likely be a buyer in the coming days. Our managers have been through this before and know that when everything is down, their set of opportunities expands tremendously.

The Founders Fund

In the Founders Fund, we reduced the equity weighting over the last couple of weeks. At the beginning of the day, stocks accounted for 61% of total assets, while the cash reserve was up to 15%. Needless to say, we have some ammunition with which to pursue opportunities as our managers identify them.

Our advice to clients today is similar to what’s served them well over the past nine years: stick to your strategic asset mix (SAM) and if you’re going to do anything in response to Brexit, rebalance back to your SAM. This is the time when you need to lean on your plan the most.