IA UK All Companies and IA UK Equity Income funds have moved to their lowest weighting to UK equities over the past three years in preparation for Thursday’s EU referendum, according to the latest FE Trustnet study, which also shows cash weightings in the UK space are at their highest level over the period in question. 
The uncertainty surrounding Thursday’s referendum has caused a great degree of volatility within markets, with the FTSE All Share and sterling having delivered hefty drawdowns over recent weeks at a time when UK gilt yields fell to their lowest ever level.
Much of this had been caused by the surging popularity of the Leave camp, with many pondering the likely impact a ‘Brexit’ would have on financial markets and the economy.
However, following the death of Labour MP Jo Cox last week, polling suggests the Remain camp have regained momentum – a shift that has seen equities rally and sterling strengthen.
Nevertheless, FE data shows UK fund managers still prefer to keep their money invested outside of the UK equity market. According to our study, the average UK weighting in the IA UK All Companies and IA UK Equity Income sectors has fallen to 89.86 per cent – the lowest level it has been over the past three years.
UK funds’ weighting to UK equities over 3yrs
Source: FE Analytics
That weighting has, on average, been 92.81 per cent over three years and hit a high of 95.03 per cent in July 2013. As the graph above shows, however, that weighting has been trended down ever since.
There are a number of funds in the two sectors that have historically made use of their 20 per cent allocation (as defined by the Investment Association) to overseas equities.
Nevertheless, many more have since taken the decision to move their capital away from FTSE-listed stocks as the vote draws nearer.
For example, Schroder Recovery has the lowest exposure to the UK equity market at 78.1 per cent, while the list of the 15 funds with the smallest weighting to the domestic market includes Liontrust Macro Equity Income, CF Woodford Equity Income and R&M UK Equity Long Term Recovery.
Indeed, of the 340 funds across the two sectors, some 12.4 per cent now have less than 85 per cent of their assets invested in the UK.
The UK funds with the lowest weighting to the UK
Source: FE Analytics
While this trend has come at a time when Brexit fears have increased, there is another potential reason why many UK managers are looking outside of the UK opportunities. Certainly, though the referendum has dominated the news of late, there has been much concern about the outlook for the UK’s dividend market.
FE Trustnet has written on many occasions about this, with many warning that will be a swathe of dividend cuts in the FTSE All Share has earnings growth has fallen, leading to lower dividend cover at a time when pay-out ratios have increased.
These fears would partly explain why the average IA UK Equity Income fund has a marginally lower weighting to the UK than the average IA UK All Companies fund at the moment (89.23 per cent compared to 90.49 per cent) – though both peer groups are at their lowest UK exposure over the past three years.
However, FE data suggests UK managers aren’t just selling UK equities and buying overseas stocks. Indeed, the Brexit uncertainty has sparked another development as the average fund in the IA UK All Companies and IA UK Equity Income sectors now has its highest weighting to cash over the past three years.
UK funds’ weighting to cash over 3yrs
Source: FE Analytics
The average cash weighting in the two sectors is now 3.93 per cent, which compares to a 2.8 per cent average over the past three years.
As the table above shows, UK managers had been putting their money to work over the early months of the year – a period when the FTSE All Share had posted losses due to fears over China’s slowing growth and oil price volatility.
However, our data shows cash weightings have spiked over the past two months – a trend which has likely been sparked by Brexit fears.
This is again shown in our most recent poll, where we asked FE Trustnet readers whether they were waiting for the results of the EU referendum before putting more money into the market of the 1,290 who have so far responded, 58 per cent say they are waiting for greater clarity from the vote before putting cash to work.
The UK funds with the highest cash balances at this time include JOHCM UK Opportunities (18.81 per cent), CF Miton UK Value Opportunities (13.19 per cent) and GAM UK Diversified (11.06 per cent).
It’s not just UK managers who have started to turn their backs on the UK equity market, however.
According to FE Analytics, funds in the IA Global and IA Global Equity Income sectors also now have their lowest weighting to FTSE-listed stocks than at any point over the past three years.
Global funds’ weighting to UK equities over 3yrs
Source: FE Analytics
According to FE data, the average fund in the two peer groups now has just 12.85 per cent invested in the UK equity market, comparted to an average of 13.92 per cent over the last 36 months.
The graph above shows that though global managers started increasing their UK exposure for most of last year, since Brexit fears started to dominate the headlines since February (as the likes of Boris Johnson joined the backed the Remain camp and sterling began to weaken), that weighting has dropped considerably.
A recent FE Trustnet article highlighted, however, that a number of global funds are still taking big bets on the UK equity market despite the upcoming EU referendum. These include the likes of CF Adam Worldwide, McInroy & Wood Smaller Companies and Lindsell Train Global Equity.