The average weighting to UK equities within the IA UK All Companies and IA UK Equity Income sectors has tanked since the EU referendum, according to the latest FE Trustnet study, which shows that the average exposure to FTSE-listed stocks within the two peer groups has fallen to just 82.12 per cent. 
An FE Trustnet article prior to the EU referendum showed that UK fund managers had reduced their weightings to UK equities and started to up their cash levels ahead of the vote – potentially so they had the firepower to take advantage of a rally when the country decided to remain part of the bloc (as the bookies were predicting).
As we know now, though, the Leave camp was victorious and nearly all financial assets were sent into an immediate tailspin.
In a dramatic turn of events, though, the FTSE 100 has rallied by more than 8 per cent since 23 June (despite the expected negative impact Brexit would have on the economy and foreign investment) as sterling has plummeted and the Bank of England has slashed interest rates and expanded its quantitative easing programme.
Performance of index since EU referendum
Source: FE Analytics
Though looser monetary policy is normally seen as a major boost for risk assets, the large majority of UK fund managers clearly aren’t being swept away by the euphoria.
Indeed, prior to the referendum, the average UK equity weighting across the IA UK All Companies and IA UK Equity Income sectors had fallen to 89.86 per cent (some 3 percentage points lower than the three-year average).
Now though, and despite the rally, that weighting stands at 82.12 per cent (which is only just above the Investment Association’s required allocation of 80 per cent). As the graph below shows, this is a significant drop.
IA UK All Companies and IA UK Equity Income funds’ weighting to UK equities
Source: FE Analytics
It is worth noting that this data is merely a snap shot in time and therefore funds won’t necessarily be booted out of the two peer groups for holding less than the required 80 per cent in UK-listed stocks for a short period.
Either way, this is in keeping with recent market trends. Data released from the Investment Association showed that £1bn was pulled out of UK funds during the month of June.
The likes of Nigel Green, chief executive officer at deVere Group, says it is right to be underweight UK equities at this point in time as UK stocks now appear to be expensive following the recent rally, the domestic economy is weakening and as a weakening sterling is causing the cost of raw materials that go into manufactured goods to increase.
“Despite, or perhaps even because, of the UK’s rally, UK-based investors need to ensure that their portfolios are adequately diversified – and this includes across geographical regions, as well as assets and sectors,” Green said.
When it comes to the UK funds that have the lowest weighting to the UK, a number of high profile names feature.
The 15 UK funds with the lowest weighting to the UK
Source: FE Analytics
For instance, FE Alpha Manager Andrew C Green’s GAM UK Diversified fund has just 71.12 per cent invested in FTSE-listed stocks, while Schroder Recovery, Liontrust Macro Equity Income and Evenlode Income all have less than 80.7 per cent in UK companies.
While many UK funds have a structural weighting to overseas stocks, our data suggests many have been selling down their exposure to domestic stocks following Brexit.
Though the study shows that some of that money has been diverted to US and European listed companies, it seems many managers have decided to take their profits from the recent rally and keep it in cash.
According to FE Analytics, the average weighting to cash across the IA UK All Companies and IA UK Equity Income sectors has spiked to 6.48 per cent from 3.93 per cent prior to the EU referendum. That compares to an average weighting of just 2.9 per cent since June 2013.
Average cash weighting in the IA UK All Companies and IA UK Equity Income sectors
Source: FE Analytics
Many of the UK funds that have the highest cash weightings today, unsurprisingly, are among the list of funds with the lowest weighting to UK equities.
These include GAM UK Diversified (21.48 per cent cash weighting), JOHCM UK Opportunities (19.11 per cent cash weighting) as well as CF Miton UK Value Opportunities (13.47 per cent cash weighting)
.
The fact that UK fund managers have been dumping UK-listed stocks and yet the UK equity market has been rallying suggests the bull run is being driven by international investors – which would make sense as UK stocks could be seen as being increasingly attractive to overseas investors thanks to the pound’s double-digit falls against most major currencies.
However, FE data suggests that managers in the global sectors haven’t been picking up the slack.
Again, prior to referendum, our study showed that managers in the IA Global and IA Global Equity Income sectors had been reducing their exposure to the UK equity market with the average allocation falling to 12.85 per cent (around 90 basis points lower than the three-year average).
IA Global and IA Global Equity Income funds’ weighting to UK equities
Source: FE Analytics
While it is by no means as drastic as the trend in the two UK sectors, the average weighting to FTSE-listed stocks in the two global peer groups has fallen to 12.5 per cent since the Brexit vote.
In a recent article, Aberdeen’s Bruce Stout (whose open-ended fund sits in the IA Global Equity Income sector and closed-ended fund in the IT Global Equity Income sector) told FE Trustnet that he would continue to avoid the UK for some time to come, and not necessarily because of Brexit.
“Plagued by punitively high public and private sector debt, hostage to foreign financing of unsustainable current account and budget deficits, overly dependent on consumption for growth and lacking meaningful economic diversification due to under investment and globally uncompetitive exports, with or without Brexit the UK economy has been in structural decline for years,” Stout said.
