Nearly one in three funds in the IA UK Equity Income sector now have at least 10 per cent in international equities, according to research by FE Trustnet, a marked increase over the past year.
In fact, our data shows that UK exposure in the two main UK equity peer groups of the Investment Association - the IA UK Equity Income and IA UK All Companies sectors - has decreased to its lowest level in at least three years.
Rules stipulate managers of funds in the two sectors can own up to 20 per cent of non-UK exposure although this also includes cash holdings, so at any one time UK equity exposure totals at least 80 per cent of the portfolio.
The average UK equity weighting in the IA UK Equity Income sector is now 88.7 per cent, compared to 94.03 per cent three years ago. In the IA UK All Companies sector the same trend is also apparent.
Of course for the latter sector, a substantial amount of assets are made up of those with a bias to mid-caps which managers are less likely to move outside the UK for exposure to. This dampens the movement out of the UK by large-cap funds in the average figures so for multi-cap or large-cap funds the effect is likely to be more similar to numbers in the IA UK Equity Income sector.
The table below shows the 10 funds across the two sectors with the highest international exposure.
Source: FE Analytics
Highly popular UK funds such as the likes of Lindsell Train UK Equity and CF Woodford Equity Income have all seen a huge boost in their performance from their non UK holdings which for the former stands at 18 per cent of the portfolio and 19.8 per cent for the latter.
FE Alpha Manager Nick Train, manager of the £1.9bn CF Lindsell Train UK Equity fund, says three of his five best performing stocks in 2015 were from outside the UK, while all five of the worst are listed on the UK stock market.
Source: Lindsell Train Investment Management
All of the five best performing stocks featured in the top 10 of the fund throughout last year.
For Neil Woodford’s £7.9bn CF Woodford Equity Income fund, at least half of the 15.9 per cent return in 2015 came from overseas or unquoted stocks such as Prothena and Reynolds American.
The former firm is the second largest US tobacco producer and like many of its peers has performed strongly of late. Its share price has risen more than 33 per cent over the past year carrying on a seven year trend of upwards movements.
The stock is also the largest positon for FE Alpha Manager Mark Barnett across his three open-ended portfolios: the £12.4bn Invesco Perpetual High Income, the £6.3bn Invesco Perpetual Income and the £1.1bn Invesco Perpetual UK Strategic Income funds as well as four investment trusts: the £1.3bn Edinburgh IT, the £921m Perpetual Income and Growth IT, the £227m Keystone IT and the £63m Invesco Perpetual Select UK Equity IT.
This was the case last year with the stock making up at least 5 per cent of each of the seven portfolios, which total £22bn.
However, his international exposure is actually at its lowest level – at about 15 per cent – in the open-ended funds since he took over from Neil Woodford in April 2014.
“I can get enough global exposure and diversification through the UK stock market,” Barnett told FE Trustnet last week.
“It is a very diversified stock market and the biggest companies aren’t necessarily UK businesses. We are not short of UK opportunities and I do go a little bit outside of the UK but I can largely [get] what I want by investing in the UK market,” he added.
Chelsea Financial's Darius McDermott says it is relatively normal for UK managers to look abroad but it is not without a potential extra layer of risk.
"The most important thing is that investors are aware of it rather than cautious or ‘for’ or ‘against’ it," he said.
"There are a number of UK managers such as Neil Woodford and Adrian Frost [manager of the £7bn Artemis Income fund] who have a lot of international exposure. If you are a large cap investor, the FTSE 100 is quite an odd index."
"It is very heavily skewed toward four or five sectors. The reason you hear from managers generally for overseas holdings is because they may think Total is better than BP or Shell for instance or that they want pharmaceuticals and they think Roche is the best bet."
"Among the most popular international stocks with UK equity managers is Swiss pharma company Roche, which is a top-10 holding for Invesco Perpetual Income and High Income, CF Woodford Equity Income and L&G UK Equity Income."
"I think it is more being aware of the fact that UK funds might do this. The only other real question is the currency and whether the foreign holdings are hedged back to sterling."
