Liontrust Special Situations, Old Mutual UK Alpha and Threadneedle UK Equity Income are among some of the funds that investment professionals have been reducing their exposure to while Standard Life UK Equity Income Unconstrained, GLG Undervalued Assets and Downing Micro-Cap Growth have been added to.
Post-Brexit attitudes towards UK equity funds and trusts are mixed among the selection of industry experts we asked – while some have treated the choppy performance of small and mid-caps as an opportunity to buy in at attractive valuations, others have been reducing their exposure to the region across the board.
Others have decided to remain neutral on UK equities with the view to ride out any short-term noise before buying or selling.
These views come shortly after the latest data from the Investment Association was released, which shows that in June, UK investment funds experienced outflows five times greater than during January 2008 – the worst month for withdrawals during the financial crisis.
Despite many investors worrying that the EU referendum would cause at best volatility and at worst a downwards spiral in markets, the FTSE 100 has returned 8.34 per cent since a Brexit result was announced.
While domestic-facing stocks further down the cap spectrum were bruised initially, both the FTSE 250 and FTSE Small Cap indices are now up 6.31 and 6.83 per cent respectively over the same time frame.
Performance of indices since EU referendum
Source: FE Analytics
"UK investors who withdrew from equity funds are probably regretting this decision in light of the performance of the stock market since the referendum, and that goes in spades for those who cashed in their ISA allowance, losing that tax shelter forever,” Hargreaves Lansdown’s Laith Khalaf said in an FE Trustnet article on Tuesday.
While retail investors seem to have piled money out of UK funds recently, have investment professionals been doing the same?
Richard Philbin, investment director at Wellian Investment Solutions, says that he has been reducing UK exposure within the firm’s model portfolios for a while.
For instance, its growth portfolio had a 42.5 per cent UK weighting one year ago, which dropped to 30.5 per cent six months ago. Currently, the portfolio has a 23.5 per cent weighting to the UK.
This isn’t entirely to do with UK funds specifically though, as Wellian has cut its equity weightings across the board from 88 per cent to 80 per cent over the last year.
“We have reduced our exposure to a number of UK funds over the past 12 months – partly due to reducing the number of absolute holdings as well as shifting the shape of the funds,” Philbin said.
“Old Mutual UK Alpha, Schroder UK Alpha Income, Liontrust Special Situations, JOHCM UK Equity Income, Miton Income, Royal London UK Equity Income, Threadneedle UK Equity Income have all been affected. The funds just listed have not necessarily been wholesale removed from the portfolios, and in some instances we have trimmed our exposure.”
“We have been reducing our exposure to the UK for a number of reasons – diversification of assets across different geographies and asset classes; broadening out the sources of income and spreading risk for example. Just because we have either sold or reduced our exposure to a fund doesn’t mean we do not like it anymore, or will not revisit the fund at some stage in the future.”
Adrian Lowcock, investment director at Architas, says that his firm has also been underweight the UK for some time given high valuations, a slowdown in growth and concerns regarding dividends at the start of the year.
“The volatility in markets has presented opportunities for investors but, going forward, we prefer to be defensively positioned in the UK and particularly the global large caps, which are less exposed to the UK slow down and will benefit from the weaker pound,” he added.
“UK mid-caps and smaller companies are more likely to be susceptible to a negative outlook for the UK and will bear a greater brunt of the weaker economic data so we would expect them to under-perform in the short and medium term.”
Hawksmoor’s Ben Conway, however, has been adding to his UK equity exposure since Brexit and has been specifically adding to funds and trusts that buy into smaller, domestic-facing stocks.
While the fund manager doesn’t adhere to benchmarks and the concept of being overweight or underweight an area of the market, he says that his UK weighting was fairly low prior to the referendum and he therefore saw weaker spots of the market as attractive buying opportunities.
“Our reaction to a big fall in sterling and UK small and mid-cap equities especially was naturally to increase our weightings. If something falls significantly in price, an investor should always investigate whether a good value opportunity has opened up,” he explained.
Performance of indices 1 Jan to EU referendum
Source: FE Analytics
“Within our Vanburgh fund, we have added to River and Mercantile UK Micro Cap Investment Trust, Throgmorton Investment Trust (both at attractive discounts), and within open-ended funds, Man GLG Undervalued Assets and Downing UK Micro-Cap Growth. Within our Distribution fund, we added to three open-ended funds, Standard Life Investments UK Equity Income Unconstrained, Fidelity Enhanced Income and Blackrock UK Income.”
However, Conway warns that the decision to add to UK equities should depend on the investor’s starting position and how much they already hold in the region and asset class.
The manager added to UK equities because it was an area of the global market that materially cheapened and because the funds already had a low exposure.
“I would stress that we are still very wary about the prospects for sterling given the parlous state of UK government finances and the large current account deficit. Given the prospects for the yen, euro and dollar are also compromised, the really interesting question for sterling-based investors is what currency risk are you prepared to take,” he continued.
“For us Asian and emerging market currencies look attractive, as does gold, which we view as a currency of sorts. Meanwhile, we still don’t think UK equities are a bargain, but there is sufficiently good value for talented all-cap managers to earn satisfactory returns over the next few years. The very best value is still to be found in micro-caps.”
In contrast, other investment professionals have decided to remain neutral on UK equities.
Jason Hollands, managing director at Tilney Bestinvest, says that he took the panic surrounding the impending EU referendum with “a huge pinch of salt” and did not alter his exposure to UK equities either in the run-up to the Brexit or during the aftermath.
“UK equities are not especially representative of the UK domestic economy anyway as the majority of UK listed company earnings are derived overseas, which is why the FTSE 100 has not only proved resilient but should benefit from the weakening of sterling as overseas revenues get translated into Sterling profits,” he said.
“So, no, we haven’t reduced exposure to UK equities per se over the last couple of months.”
“In fact in the aftermath of the referendum, the weaker pound should make UK assets look more appealing to overseas investors and this could sooner manifest itself in an uptick of M&A. The recent acquisition of ARM by Japan’s SoftBank could be the first of many such deals.”
Hargreaves Hale’s Neil Jones agrees that the weaker value of sterling should provide attractive opportunities for overseas investors as well as for UK exporters over the coming months.
While he has begun to increase portfolio weightings to overseas equities - particularly in the US and the Far East – he says the firm is slowly beginning to rebuild its UK exposure very selectively.
This is mostly through FE Alpha Manager James Henderson’s £406m Lowland Investment Company.
“We were raising cash for clients ahead of the vote, by way of caution, as markets had been relatively strong, something I felt was a little too complacent regarding the certainty of the outcome. This tended to be more along the lines of taking some profits out of investments which had performed strongly, rather than selling out entirely though,” the investment manager explained.
“Since this time we have been making sure clients have a healthy weighting overseas, particularly in the US and Far East, along with taking advantage of some discounts on investment trusts.”
