A fantastic run for UK equities over the past year has meant the team at Thomas Miller Investment have moved some of their allocation away from the UK. 
The model portfolios, which we went under the bonnet of earlier, typically have a 60 per cent allocation to the UK within the equities portion of each portfolio, with the remaining 40 made up of international equities.
However, this has been reduced more recently as the managers have taken some of the profits made over the past few years.
While the UK has underperformed the likes of the US and emerging markets in 2016, much of this has had to do with the devaluation of sterling following the referendum on EU membership in June.
Performance of indices over 1yr
Source: FE Analytics
Indeed, on an absolute basis, the FTSE 100 has returned 24.56 per cent over the last year, though this is 13.75 percentage points below the top performing MSCI Emerging Markets index.
“It [FTSE 100] had a great run last year and a lot of that was driven by large-cap and therefore by currency so when we had that run it just seemed natural to take a little bit of the bet off,” head of private client investment management in the UK Andrew Herberts said.
Jordan Sriharan, head of collections research at Thomas Miller Investment, added: “Our portfolios have a slight bias to UK equities which have done well thanks to the depreciation in sterling and the internationally geographic make-up of the companies and global growth being quite strong.
“This meant that the equity market has done fantastically well and our portfolios have probably outperformed to a larger extent than we expected.
“We have rotated a bit out of the market to add to those areas that we are a bit more comfortable in from a regional perspective.”
However, the pair remain positive on the UK economy.
Herberts said: “Indicators look quite good, weak sterling should help to rebalance the economy into a slightly less services-dominated economy. We’re reasonably positive.”
Indeed, when the firm has rotated back into the UK market it has looked at funds with mid-cap bias. Companies in the sector typically have more of a domestic focus, though the firm is also looking to maximise exposure to UK stocks that will benefit from a boost to exports from weaker sterling.
As such, the team added the five crown-rated Neptune UK Mid Cap fund run by FE Alpha Manager Mark Martin.
The fund, which has been a top quartile performer in the IA UK All Companies sector, has returned 9.87 per cent over the last six months since the team have held it, and over a longer period is up 124.39 per cent over the past five years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
“This has come in more recently and gives us a bit more of a UK mid-cap bias,” Sriharan said.
“The fund has a very poor time from summer 2015 to summer 2016 as it is quite a concentrated portfolio and they got some ideas wrong.
“We bought the fund because it had a great long-term track record a bit like how a value equity manager loves a stock over the longer term and buys it because it has been trampled on by the market.”
Herberts added that the team are even looking at going further down the market cap spectrum, depending on whether the value trade continues to hold up.
“We are looking at a couple of names in there based not only on the areas of the market that are now value and have been left behind but also some technical issues on the horizon,” he said.
However, last year the portfolios made most of their gains through passive vehicles, with L&G their preferred passive strategy provider.
Sriharan said: “We have owned traditionally a mix of passive and active managers and passive as you know is the index and that has a sectorial biased to the miners and the oil stocks and the financials.
“Last year we owned more passive than we owned active managers in our UK equity space and that helped our UK part to outperform.
“What we’ve started to do is look at since [Donald] Trump was elected – and that was significant not because he was elected but because sector dispersions started to be built into the returns within different equity markets – is whether to move back out of passive into active management.”
While the portfolios had a majority of their money invested in passive vehicles there are three names they have owned over the longer-term.
The first is Adrian Frost and Nick Shenton’s £6.5bn Artemis Income fund, though the firm has reduced its holding in this slightly more recently due to its impressive run and slight underperformance last year.
“It is a name that we have held for a long time and has a fantastic long-term track record but fell off the rails a little bit in 2016 as they lost one of their managers [Adrian Gosden],” the portfolio manager said.
The next is the £1.5bn Investec UK Alpha run by Simon Brazier, which has also been a top quartile performer over the longer-term.
“We used to have his Threadneedle fund and when he left we followed him because we love his process, we love his investment philosophy and he is running money in a way that we totally understand and is transparent,” he said.
The final fund is the five crown-rated, £3.7bn Threadneedle UK Equity Income run by Richard Colwell.
Performance of funds vs FTSE All Share over 5yrs
Source: FE Analytics
“We held this before but in a smaller percentage and have now added more from Artemis so we own both but the weightings between the two have changed over time.
“Run by Richard Colwell it is again a fund that we have a high conviction in, it isn’t particularly aggressive, it has a good active share or at least one we are comfortable with.
“We expect them to outperform their benchmarks over the longer term and can pair them up with passives to outperform the FTSE All Share,” he said.