Almost a quarter of the FE Alpha Managers in the IA UK All Companies sector have allocated at least 10 per cent of their assets to international markets with several on the cusp of the 20 per cent threshold.
Under Investment Association rules, funds in the IA UK All Companies sector must have at least 80 per cent of their portfolio invested in UK equities.
However, there are a number of funds that are sailing close to that limit, according to data from FE Analytics.
Of the peer group’s 265 members, 42 hold FE Alpha Manager status. FE Trustnet found that 10 of these have 10 per cent or more invested outside of the UK, as the below table shows.
Source: FE Analytics
Patrick Connolly, head of communications at Chase de Vere, said: “From the manager’s perspective, if they don’t think there is adequate value in UK stocks and think that there are better opportunities overseas it makes sense for them to use a significant amount of the 20 per cent they're allowed to invest overseas.”
He added: “The issue is for advisers or investors who are putting together an asset allocation strategy within their portfolio and allocate a specific proportion to UK equities and overseas markets.
“They’re trying to get exposure to UK equities through a UK fund but if managers have more of their assets overseas it changes the overall mix in portfolios.”
Below, FE Trustnet takes a closer look at the three IA UK All Companies funds overseen by FE Alpha Manager with the least exposure to UK equities.
LF Lindsell Train UK Equity
At the top of our list is the £5.3bn five FE Crown-rated LF Lindsell Train UK Equity fund, managed by Nick Train, which has the highest exposure to overseas stocks at 18.3 per cent of the portfolio.
Among the veteran manager’s top foreign-listed holdings are US snacks company Mondelez International and Dutch brewer Heineken, which represent 6.2 per cent and 5.5 per cent of the high-conviction fund respectively.
FE Invest analysts noted that the manager aims to identify companies that will survive over the long term by maintaining competitive advantages, although there are few UK companies that match his criteria, resulting in a highly concentrated portfolio of around 25 firms.
As such, the analysts pointed out that Train has taken to hunting further afield allocating to non-UK equities in order to gain access to global leaders.
“Although this is an active fund, Train very rarely changes the portfolio,” the analysts noted. “This is simply because he applies a very strict investment approach, so once a stock meets his criteria, should the investment case remain there will be no reason to sell it.”
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in July 2006, the fund has returned 315.06 per cent compared with a 119.77 per cent gain for the average IA UK All Companies fund and a 116.80 per cent return for the benchmark FTSE All Share index.
LF Lindsell Train UK Equity has an ongoing charges figure (OCF) of 0.70 per cent.
Royal London Sustainable Leaders Trust
Next on the list is the £632.2m four FE Crown-rated Royal London Sustainable Leaders Trust, managed by Mike Fox.
The UK growth fund – which focuses on core themes of the environment, human welfare and sustainability to drive returns – has a 17.3 per cent exposure to overseas equities.
Indeed, the fund’s top holding is Amazon, which represents 4.9 per cent of the portfolio. Other large US positions include Microsoft (3.9 per cent) and Google parent Alphabet (3.5 per cent).
Another significant overseas holding is Dutch semiconductor manufacturer ASML Holding at 3.6 per cent of the portfolio.
Fox, who is also head of sustainable investments at Royal London Asset Management, said the trust’s overseas exposure had detracted from performance during the first quarter of the year as it fell by 4.15 per cent.
He noted: “Global shares fell, snapping a string of nine straight quarterly advances as measured by the FTSE All World Total Return index in sterling.
“Following a small rise by equities in January, concern about inflation and global protectionism resulted in market volatility that led to a ‘risk off’ mood among investors over the following two months.”
Under Fox, the fund has delivered a return of 350.64 per cent compared with a 226.82 per cent gain for the sector. Royal London Sustainable Leaders Trust has an OCF of 0.76 per cent.
Fidelity Special Situations
Finally, the £3.2bn Fidelity Special Situations fund, managed by Alex Wright, is also making greater use of its 20 per cent overseas equities allowance.
According to analysts at Square Mile Research, Wright will allocate to overseas stocks where a compelling opportunity exists or a similar one is not available in the UK market.
The four FE Crown-rated fund has a 17 per cent weight to international companies, although the portfolio includes several Irish companies with listings in the UK.
The fund, which is able to take long and short positions in listed markets, has a net 75.6 per cent exposure to the UK and 8.8 per cent to Irish companies. The second largest country exposure is to US stocks, which represent a net 9.2 per cent position.
One of the largest overseas holdings in the fund is US bank Citigroup, which accounts for 4.6 per cent of the portfolio, while Irish building materials company CRH makes up 4.5 per cent.
Performance of fund vs sector & benchmark under Wright
Source: FE Analytics
Since Wright took over the fund at the beginning of 2014, it has delivered a total return of 52.27 per cent compared with a 38.38 per cent gain for its average IA UK All Companies peer and a 38.07 per cent return for the FTSE All Share benchmark.
Fidelity Special Situations has an OCF of 0.75 per cent.