• Company is stocking up on U.S., Japanese and euro securities
  • It sees sterling tumbling as much as 20% if U.K. leaves EU

The pound may have rallied amid evidence U.K. public opinion is shifting away from a Brexit, but one fund manager isn’t taking any chances.

Investec Wealth & Investment Ltd. has increased its holdings of non-sterling government bonds to protect against a slide in the U.K. currency should citizens vote to quit the European Union on June 23. The unit of the London-based bank anticipates a drop of as much as 20 percent versus the dollar if the “leave” campaign prevails.

“The chance of Brexit appears to be receding but we still need to have tail hedges in place,” said Darren Ruane, a fixed-income manager at Investec Wealth & Investment, which oversees 26 billion pounds ($38 billion). “If sterling falls because we have a negative risk event, and because the U.K. leaves the EU, we need lots of investments that will go up in other currencies to spread the risk.”

Non-U.K. government bonds represent 2.5 percent of the company’s assets, up from 1.5 percent three months ago, Ruane estimated. Most of the recently added holdings are U.S. Treasuries, followed by Japanese and euro-zone securities.

Sentiment Gauge

The pound has borne the brunt of concerns Britain will leave the world’s largest single market, which both the government and Bank of England have warned will hurt the economy. Sterling tumbled 6 percent in January and February, reaching a seven-year low of $1.3836 on Feb. 29, and for the next two months swung between gains and losses as polls suggested the result was too close to call.

This past week, the pound rose against all of its major peers as surveys suggested voters were more likely to back the status quo and betting company William Hill put the chances of a “remain” vote at 82 percent. Sterling briefly lost its tag of the year’s worst-performing Group-of-10 currency, though by Friday afternoon it had resumed that mantle with a 2016 loss of 1.5 percent that left the pound at $1.4511 as of 5 p.m. London time.

BOE Governor Mark Carney is due to testify before Parliament’s Treasury Select Committee on Tuesday, where lawmakers may grill him on his recent remarks warning against Britain leaving the EU. Some critics have said his comments risk politicizing the central bank, while Carney argues it’s his duty to highlight issues that may influence policy.

Contagion Risks

Potential contagion from a Brexit prompted Investec to reduce its holdings of stocks to about 62 percent of its funds, according to Ruane. It has also bulked up on index-linked gilts because a weaker pound would probably stoke inflation, Ruane said.

A Brexit would make sovereign bonds from the euro-zone peripheral nations “vulnerable” because the whole European project would be under threat, according to Ruane.

“When risk sentiment turns against Europe, it’s peripheral countries that lose out in market terms,” he said. “Generally, we reduced our exposure to risky assets as we’re going to see more volatility going forward.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE