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MIF – Impact of Brexit

June 28, 2019

Brexit has triggered a large sell-off of all risk assets, particularly those with exposure to the UK. Financials have been the hardest hit as London is the heart of the European bank system and the Head Office to the majority of the financial worlds European operations.

MIF invests in debt securities of Australian retail banks only, and therefore has no direct exposures to London’s financial issues. The MIF strategy of being exposed to APRA regulated banks has protected the portfolio, and while we have seen some impacts, they have been quite small.

Brexit will impact bond and credit markets by movements in interest rate and changes to the cost of credit (including credit rating downgrades). MIF mitigates the interest rate changes by investing in low duration securities (floating rate notes) and MIF credit is limited to Australian banks, which have no direct impact from Brexit.

Outcomes since 24th June referendum
After the initial four days that the market has had to absorb the surprise exit vote, the outcomes to MIF from Brexit have been muted. The market is functioning well, with buyers and sellers participating (albeit with lower volumes) and prices coming off by just 0.20% to 0.30%. The moves in credit is has only partially re-traced the strong rally over the last two to three months and at this point is within recent trading ranges. Major Banks have completed the majority of their debt financing needs for calendar year 2016 and are well positioned in this market.

Current Status
MIF will post a strong June quarter return (currently over 1.00%) and continue to have a running yield approaching 4%, with a low duration portfolio that is well placed to continue its strong 2016 performance.