Value investor Dan Brocklebank: Don’t panic. Here’s why UK much better off outside EU.

Those panicked by the Brexit result need to take a deep breath and have a listen to this pre-vote interview with highly rational money manager Dan Brocklebank who explains why considerable upside will flow from the nation’s decision to leave the European Union. Brocklebank, director for UK business at value investment house Orbis, says his team’s research suggests there will be little real impact of a Brexit on any of the stocks they own while, as a private citizen, he is delighted at the benefits which range from the UK regaining control of its legal system through to its ability to extricate itself from the mess of Europe’s unsustainable economic structure. Like the rest of the financial community, he struggled to understand how the bookmakers made “Remain” such an overwhelming favourite and resisted the temptation to grab the profit. He must be feeling a little like those lifelong Leicester supporters who missed the odds ahead of the club’s equally big upset. – Alec Hogg  

I’m joined now by Dan Brocklebank who is the Director of U.K. Business for Orbis. South Africans will know Orbis as the associate company of Allan Gray. Dan, I remember visiting your offices a while ago and meeting there with the late Simon Marais who then went off to Australia. He must have been a big loss for your group.

Yes. Hi, Alec. Absolutely. He was a loss for the group and for me personally, actually. I’ll always remember that day when Simon just arrived in the offices. He was intellectually as well as physically, a giant of a man. The offices were built in the 19th century. The door frames were very low and he had perpetual struggles with those. He is a big loss to the group but his spirit and what he taught the group of us who were in London lives on and we all benefitted from his wisdom. We are applying what he taught us day in and day out. We have very fond memories of him but what he taught us and how he inspired us, very much lives on today.

That philosophy, both from Allan Gray and then from Simon Marais still permeates through the group. I guess when you have a look at all the hype around Brexit, it must be very difficult given your philosophy of analysing companies rather than the big trends, to really apply this to your investments.

You’re spot on there, Alec. As you know, we’re bottom-up investors and we’re looking through companies. The problem with an event like Brexit is twofold and it’s a good example of why it’s incredibly difficult to invest from a top-down perspective. If you just take this vote on the 23rd of June… If you want to invest on the basis of it you firstly have to ask, “What is the outcome going to be?” That’s incredibly difficult to decide and the posters are all over the place. I talk a little bit about that but they’ve got a terrible history in the U.K. recently, and these are people who are doing that professionally so that’s a very difficult decision. Even if you knew which way it was going to go, you would then have to be able to predict (with certainty) how people will respond to that. That second question is just as difficult as the first one. If you want to invest on this basis, you’ve got to get both of those questions right.

I just think that’s very difficult to do. We’ve looked around and really, as this even approaches we’ve been looking at all of our companies and saying, “To what extent does a Brexit vote either way present a risk or an opportunity for businesses that we own?” and we have not really found it to be a material driver of any of the businesses. As you know, we have a global outlook – a global portfolio – and even those companies that we hold in the U.K. may be U.K. listed (they tend to be multinationals so they’re very unlikely to impacted by even the direst of Brexit outcomes).

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That’s interesting. What kind of U.K. companies would then be influenced if Britain were to leave the EU?

Even that question is quite difficult to answer because you’ve got to know what the impact of Britain leaving the EU is going to be and nobody knows that. That’s kind of why we’re having a referendum – because it’s a decision with such an uncertain outcome. I can be a little bit more helpful in that. I think that clearly, there will be some impact on the exchange rate. Most people would expect that in the event that Britain votes to leave the EU the Sterling would weaken, and so business with earnings outside of the U.K. might benefit from a translation impact. How severe that is or how long that lasts for is very hard to tell so I would be very reluctant to build a thesis around that. I think that at the very small cap end of the listed market in the U.K., there might be individual businesses that could be particularly impacted either way if peculiarities or strange effects occur. It’s not really an area where we would look anyway, for our ideas and so they’re not really of concern to us.

There’s quite a lot of emotion though, in the City of London. I know that as investors, you sit a little bit apart from that. Were they concerned that a Brexit would affect London’s status as the financial centre of Europe? By definition, it would no longer be part of Europe. When you look at banking stocks for instance, is it something that does come into the equation?

Look, I think it’s one of many risks that banking stocks face at the moment. I think it is certainly a factor there but frankly, the banking industry has arguably even bigger problems to address globally, which is the way regulators are impacting its business model, allowed returns, and the degree of risk that banks are able to take on. I think it is one that you can add to a long list of risks that the banks face in the U.K.

Dan, British tradition is that you don’t talk publicly about who you vote for but in this case, there seems to be an exception. We haven’t had any problem in finding Brits giving us their views on whether they’re going to be voting to remain or to leave. Are you happy to give us your opinion?

Sure, with the caveat that it’s still a couple of weeks away and as any investment analyst would tell you, you have to be flexible and willing to change your mind. If I had to vote today, I would vote to exit. There are a number of different factors behind that. The main one for me is restoring the primacy/sovereignty of parliament in the U.K. I think the decisions that have been taken at the European level are ones that the U.K. is the most outvoted nation in terms of decisions where qualified majority voting is taking place, and so we have been outvoted on that. From an economic perspective, I would expect there to be short-term pain but we are the 5th largest economy in the world. I fully expect that we will be able to stand on our own in the event that the rest of Britain agrees with me. As I look across Europe, I think the bigger problem is there are fundamental structural problems that are not being addressed and are being papered over.

There is going to be a serious problem in Europe at some point in time. I don’t think our ability to prevent that happening is realistic. I think it’s better to step off the train now, to enable those countries to either reform themselves in a way that is palatable to them but which is unlikely to be palatable to the U.K. or to get out of the way before the disaster happens. I would stress that that’s very much a personal view. At Orbis, be don’t have a house view. Those are just my thoughts.

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It’s interesting Dan, because up to now the reaction one gets from the financial services sector is (overwhelmingly) that they want to remain but reading through history, it would suggest that with the way that technology has changed, big government as well as big business is not quite as palatable as it used to be in the past. Is that also shaping your thoughts?

I’m not quite sure what you’re trying to get to there, Alec. Could you rephrase the question?

Yes. Big business and big government don’t do as well when you have free flowing information, as is the case at the moment. Why should Brussels for instance, make decisions on what happens in Newcastle whereas they’ve got other issues to worry about? This is almost a philosophical question, I guess. Is that shaping your thought as a Brit?

I think it is. There’s a lofty principle of subsidiarity, which is essentially trying to devolve decision-making down to the lowest possible level. I’m not an expert by any means in European decision-making, but I see limited effort that that is happening, and so I think that’s fair to say.

Amongst your friends, are you an outlier in this view?

No. It’s all over the place, to be honest. One of the things which is perhaps most interesting is that… Firstly, just to put some colour on the debate that’s happening in the U.K. and why this is particularly interesting is that the ‘remain’ camp are using a very facts-based argument. I.e. the cost of leaving is going to be X. It’s a relatively rational fact-based argument. Where the exit camp is differing is that they are using what tends to be more of an emotional campaign and that ranges in the spectrum from perhaps people like me who would see that restoring the primacy of decision-making back to the U.K.is important all the way through to the other end of the spectrum where there are bluntly, people who feel very economically disadvantaged and they see the EU as a manifestation of globalisation. They feel very disadvantaged by that and the immigration issue is a very powerful one for them.

Up until recently, the opinion polls have been very solidly in favour of the ‘remain’ camp but there are significant problems with opinion polls on an issue like this where it’s very hard to find an appropriate sample size. I suspect there may be significant flaws in the opinion polls. One aspect is… As you say; in the past, people have been unwilling to talk about how they’re going to vote. I think there has been a social acceptability issue behind saying you would vote for Brexit. If you look at the difference between telephone polls and Internet polls, Internet polls tend to skew much more towards Brexit. I.e. where the participant views that the survey is confidential and anonymous, many more people say ‘Brexit’. Where it’s a telephone poll and they are speaking with somebody else on the other end of the phone; those polls have tended to skew towards the ‘remain’ camp.

I think that might be illustrating a tendency that the polls could (and the majority of the polls tend to be telephone based, I believe) be underestimating the likelihood of an exit.

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When you get into that booth, which is private, you will give your true feeling and the Internet would suggest that the Brexit camp has a much stronger chance in that kind of forum than if you were to be asked for an audible vote, for example.

That’s right. When you say ‘much stronger’, I don’t think it’s a slam-dunk either way. I think it’s going to be a very close vote, according to all of the opinion polls but it would suggest that that’s right. When voting in confidence, people are more likely to vote Brexit than they would say they are, in telephone opinion polls.

Dan, on the other hand, if you look at Betfair and the betting exchange odds that are coming through there; the return you can make out of the EU vote going to leave is eight times what you would make if it were to remain. Is that – again – maybe being influenced by money coming from the city?

I agree. I think it is a genuine puzzle. It’s a great question. I’m tempted to believe there’s some significant value in that market but I recognise that my core skill is not in analysing political odds so I have restrained from that. That is an enigma and I think the only time we will know who is right, will be on the 24th of June.

If it’s a very close vote one way or the other – again, putting your British cap on – would you imagine that there would be some kind of compromise from both camps?

It’s not clear how you can compromise. This is literally an in or out vote so I don’t think standing in the doorway is an option. If there is an exit vote, there is a specific legal obligation, which is to renegotiate an exit from the EU. I think that if there are a majority of votes for an exit, that process will have to be put into practice. We’re in uncharted territory and I’m really speculating there but I can’t see room for compromise, given the way the debate has been framed.

Politically though, it would clearly have impact on the government and on the Prime Minister’s continued service.

All of that speculation is entirely valid but I’m going to take a pass on that one. I think that whatever the Prime Minister has said (and he has said he would stay on, regardless), there is a very interesting question, which is that if the vote is for an exit it is how the majority of people who’ve said that they do not support it would actually be able to implement that. I think it is a valid question.

You said we’re in uncharted territory. You also mentioned earlier that the primacy of bringing back the courts or the legal decision-making to the U.K. is something, which is influencing you. What recent issues (or any issues) have aggravated you or shaped your opinion in this regard?

It’s a good question. If you just bring it close to home and you look at regulation covering our industry – the multiple layers of regulation that come in, all of which seem to take a slightly different approach and don’t seem to be joined up in any regard – that would be one example that has directly impacted us. I think the U.K. SEA is a very well placed body to regulate the industry. Clearly, a Brexit does not solve that problem because we have clients in Europe and so we will still need to operate there, but I think that would be one example of decision-making, which is symptomatic of the problems that people feel.

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