Advisers strap in for downhill run

Panellists\' bearish views on Britain, which triggered cuts in domestic equity weightings in the AFI rebalancing, were backed up by depressing business and consumer data last week.

Economic data did little to cheer British equity investors last week. Before the Bank of England’s interest rate cut, surveys published by Markit Economics and Nationwide revealed downbeat assessments of both business activity and consumer confidence.

The seasonally adjusted headline Chartered Institute of Purchasing & Supply (CIPS)/Markit Business Activity index dropped to its lowest level since data was first collected in July 1996. The index dipped to 40.1 in November (readings below 50 are indicative of worsening conditions) the seventh successive monthly activity fall.

Other figures in the survey were equally gloomy. The Outstanding Business index – a measure of levels of unfinished work – contracted at a survey record rate, as did the Employment index. Significantly, British service providers were, for the first time, pessimistic. The Service Sector Business Expectations index fell to 49.5, with almost one-third of respondents forecasting lower activity in 12 months’ time.

Nationwide’s Consumer Confidence index also fell sharply, from 56 in October to 50. The index, based on a survey of 1,000 people conducted by Taylor Nelson Sofres, showed that 76% of consumers regard the economic situation as “bad” – an increase of one percentage point from October. The proportion of respondents expecting worse conditions in six months’ time also rose, to 45%.

Views on employment prospects were also downbeat. Nearly half those surveyed said there were “not many” jobs available – more than double the percentage recorded in May. Forecasts for May 2009 were pessimistic, 59% of those polled expected a lack of opportunities. Reports of redundancies at high-profile firms and the demise of MFI and Woolworths last month further stoked uncertainty on jobs.

According to Capital Economics, the decline in the CIPS/ Markit Business Activity index was consistent with a contraction of 1.2% in output in the services sector over the past quarter – the worst rate since the early 1980s. Capital Economics also said that British GDP growth in 2009 could fall below the 1.5% contraction it previously forecast. “Overall, these figures confirm that the economy is going downhill rapidly,” it concluded.

Adviser Fund Index (AFI) panellists displayed an equally bearish stance on the British economy in the November rebalancing. Advisers slashed their aggregated domestic equity weightings in the Aggressive, Balanced and Cautious indices by seven, six and five percentage points respectively. Several British-focused funds were ejected from the AFI, including Aegon UK Opportunities, Gartmore UK Focus and Standard Life Investments UK Equity Unconstrained.

David Wynn, investment director at Bentley Jennison Financial Management, takes an international approach to stockmarket investing through a combination of multi-manager portfolios and Neptune Global Equity. However, he also chose to maintain 10% Balanced and Cautious AFI index allocations to Neil Woodford’s Invesco Perpetual Income fund last month, despite largely downbeat expectations for British stocks.

“While we don’t make macroeconomic calls, the UK is going to struggle,” says Wynn. “Because we are a service economy, we can not export our way out of a recession. There may be a strong stockmarket rally after the inauguration [of President Barack Obama, on January 20] but it will be a long time before we are out of the clouds of recession. We will be range-bound in terms of the equity markets and the next two years will be tough – investors must get their asset allocation right.”

Wynn says he prefers emerging market equities as a long-term play, as well as American and commodities stocks. However, Bentley Jennison’s portfolios still have lower equity weightings and are more broadly diversified in asset class terms than those of the other AFI panellists. In the Aggressive index, for example, Wynn has a global equity weighting of just 65-70% compared with 85% for the index as a whole. Corporate bonds make up the remainder of his Aggressive allocation.

Darius McDermott, the managing director of Chelsea Financial Services, also resisted the temptation to make short-term changes in the face of worsening conditions. “I expect the UK to underperform over the next six months and the recession will be nasty,” says McDermott. “But we did not make any big calls on the UK, and we are not going to change our spots just because the markets have changed.”

AFI guidelines require panellists to invest with time-horizons of between five and 35 years, with longer-term views expressed in the Aggressive index.

However, McDermott did make changes within his British allocations. In the Cautious index he cut his weighting in Artemis’ £2 billion Income fund from 10% to 5% to increase his overseas exposure. In the Aggressive benchmark, McDermott removed Rensburg UK Select Growth Trust and Jupiter UK Growth, and added M&G Recovery. Alongside the Artemis and M&G funds, Invesco Perpetual High Income and BlackRock UK Absolute Alpha form the core of Chelsea’s exposure to British equities.


The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).