Britain seduces as euro struggles

Problems in the eurozone prompted panellists to increase their regional bias towards Britain and to move away from financials, the latest rebalancing of the FE AFI Balanced index reveals.

November’s rebalancing of the FE AFI Balanced index shows panellists have continued to allocate more money towards Britain over the past year, while weightings to international regions continued to shrink.

Allocations to Britain decreased from November 2009 to November 2010, but since then they have increased from 42% to 45%, gaining two percentage points at the latest rebalancing. Allocations to the rest of the world fell from 58% to 55% since November 2010.

Of the biggest regional losers, ’international’ lost five percentage points at November’s rebalancing, while ’other’ and America both lost one percentage point. Despite the continuing political and financial turmoil in the eurozone, allocations to Europe excluding Britain flat-lined at 11%.

FE AFI panellists have noticed the trend. Graham Toone, the head of research at AFH Independent Financial Services, says the ongoing uncertainty could be having an effect on allocations. “We tend to focus more on sectors rather than geographically, but I can see that because of all the uncertainty people might be favouring sterling denomination more than the likes of the euro,” he says. (AFI continues below)

However, equity weightings appear to contradict regional allocations. British equity weightings decreased by two percentage points from 27% to 25% at the rebalancing. European and American equities both lost one percentage point, while Asia Pacific equities and cash both gained one percentage point. Other international equities increased three percentage points, climbing from 7% to 10%.

In the sector breakdown, financials lost one percentage point in November’s rebalancing, taking the sector’s weighting from 9% to 8%. This, perhaps, reflects investor fear about the exposure of eurozone debt in banks based both in Britain and throughout Europe. Toone adds it is not just investors who are aware of the industry’s problems. “Every man in the street knows what is going on here,” he says.

During the period between rebalancing in May and November of this year, several problems have emerged to affect confidence in financial firms. As the extent of exposure various global banks have to the debt piles of Greece and Italy have become clearer, investors have grown increasingly concerned.

In particular, the political response to Greek debt may have exacerbated these fears. As part of the solution, banks have had to agree to write down 50% of their Greek sovereign debt holdings. Meanwhile, problems relating to specific banks have also emerged, with payment protection insurance (PPI) claims hitting the balance sheets of several British banks.

These trends have played out in fixed income as well, where banks form a substantial portion of benchmark indices for corporate bond funds in particular. There was a sharp increase in allocations to ’other’ fixed interest over the last year, climbing by three percentage points to 10% in May’s rebalancing, and by two percentage points to 12% in November. Corporate bonds have witnessed a directly opposing shift. Allocations fell by four percentage points to 15% in May and three percentage points to 12% in November.

It came as little surprise that M&G, one of the broadest and highest-performing fixed income providers, featured strongly in the top five funds chosen by panellists at November’s rebalancing. In order, the top five were Legal & General Dynamic Bond, First State Asia Pacific Leaders, M&G Property Portfolio, M&G Optimal Income, and M&G Global Basics. The placing of the three funds puts M&G as the single top provider in the Balanced index. Toone says he supports M&G because the firm does a good job, and as he puts it, “is up there as one of the most respected fund houses.”

The top five funds rejected at rebalancing were Sarasin GlobalSar IIID, Investec Sterling Bond, Cazenove UK Corporate Bond, Threadneedle UK Property and Thames River Sterling Global Bond.