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The reason Miton’s multi-asset team has doubled its UK exposure this year

14 June 2018

Miton Asset Management´s Henna Hemnani explains the reasons that have led the team to increase allocation to the UK across the multi-asset range.

By Maitane Sardon,

Reporter, FE Trustnet

Very strong price momentum coupled with a sterling weakening over the last few weeks has led Miton to double its exposure to UK stocks over the past six months, according to Miton’s Henna Hemnani. 

Hemnani (pictured), who is an assistant fund manager on Miton’s multi-asset fund range, said the team has been finding better value in the UK market more recently, particularly as it has lagged global peers since the EU referendum in June 2016. 

“We try to avoid many cognitive biases, such as having a permanent home bias, and have therefore been fairly light in the UK for some time because of ongoing political and economic uncertainty around Brexit negotiations,” Hemnani said. 

“However, we’ve been adding to the UK this year on positive price momentum and have more or less doubled our UK equity weight. 

“The UK market has lagged and often markets that lag we expect them to catch up. We feel the UK is better valued today and we think there is a lot of room for it to catch up.” 

Performance of indices over 5yrs 

 

Source: FE Analytics 

The weakening of the sterling is another reason the team has become more bullish on the UK, as a weak currency will benefit the market given its bias towards overseas earners. 

“The UK market is a big beneficiary of a weaker currency. If this trend continues, it could trigger a dramatic asset allocation shift towards the UK, so we are quite positive.” Hemnani noted. 

As such, despite being underweight UK in 2017 – which Hemnani said actually helped performance –  the team has been increasing exposure to UK over the first six months of 2018. 

At the beginning of 2018, Anthony Rayner and David Jane’s £553.4m Miton Cautious Multi Asset fund had a 6 per cent allocation to UK equities. 

Now the five FE Crown-rated fund has a UK weighting of over 12 per cent, mainly in overseas earners and sectors such as energy, materials and basic industries. 


 

“We haven’t been buying domestic stocks,” she explained. “It is not that we have been buying stocks because we are positive on the UK economy, we have been buying mainly oversees earners and those UK-based companies that operate on a more global scale. 

“We have been adding mainly energy, including stocks such as BP or Shell. We also hold materials and basic industries, so, a lot of stocks that will benefit in an inflationary environment and with a bias towards overseas earners that benefit from a weak sterling.” 

Among the UK-focused businesses they hold, Hemnani said the team owns supermarkets such as Tesco and Morrisons, as their ability to put the prices up will help them benefit from an inflationary environment. 

Other UK stocks the team has recently bought include Premier Oil and Tullow Oil, Johnson Matthey, Intercontinental Hotels Group, Bunzl and National Express. 

The reason the team have largely avoided domestically-focused stocks is that although they are attractively valued, they don’t see enough momentum yet. 

“We do feel like it is cheap but we care about positive momentum and when we look at the actual stocks we are not seeing enough momentum to buy those domestic stocks yet,” Hemnani noted. 

Indeed, since the referendum, shares in blue-chip companies with big overseas businesses have done much better than those that are UK-focused, as the depreciation of the sterling has boosted share prices of those UK-listed companies making big profits overseas. 

Despite signs of more synchronised global growth more recently, Hemnani said paying attention to the different regions’ exposure is key going forward. 

Manufacturing PMIs 

 

Source: Miton Asset Management 

Another geographical region where the team is currently finding opportunities is the US, an investment case supported by the country’s rising PMI figures – an indicator of economic health –planned tax cuts and global economic growth leadership moving towards the North American country. 


“The story of 2017 was strong and synchronised global growth, and almost all equity markets made good returns over the period,” said the Miton manager. This year, however, the behaviour of economies seems much less uniform. 

“We’re seeing a shift in global economic growth leadership towards the US, away from the synchronised scenario.” 

She added: “From the beginning of this year you can see a divergence in the PMI data, with the global PMI falling, albeit still at very healthy levels, but the US PMI continuing to rise. 

“US economic strength is further supported by the planned tax cuts. In this environment we would expect US equities to benefit and we have therefore increased our US equity exposure.” 

Indeed, fund managers have been turning bullish on the US, with allocation to US equities in June moving to a net overweight position for the first time since March 2017, the latest Bank of America Merrill Lynch (BofA ML) Global Fund Manager Survey has revealed. 

“We expect the US to be a beneficiary of the current backdrop, which has repercussions for the emerging markets that have a material amount of their debt denominated in US dollars, as the cost of their debt rises when the dollar rises,” added Hemnani. 

As such, the manager pointed out the team is more comfortable with their exposure to the emerging market countries that are less sensitive to these global factors, like China, but have been reducing emerging markets that are more vulnerable, like Latin America. 

“Our sectoral asset allocation is broadly unchanged, as the absolute level of global PMIs remains high and in this risk on environment we still expect risk assets, specifically cyclical equities, to outperform, said the Miton manager. 

 

Performance of fund vs sector over 3yrs 

 

Source: FE Analytics 

Over three years, the Miton Cautious Multi Asset has delivered a 20.61 per cent total return, compared with a 15.93 per cent gain for the average fund in the IA Mixed Investment 20-60% Shares. The fund has an ongoing charges figure (OFC) of 0.84 per cent. 

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