Thesis cuts back UK equity in model portfolios


Thesis Asset Management has cut exposure to UK equities across six of its seven-strong range of model portfolios due to concerns that reduced business investment and a hit to household spending post Brexit is yet to be felt.

“With equities currently at the upper end of their trading range and valuations generally high, now was a good time to trim back,” says Ryan Paterson, research manager at Thesis.

Positions in UK equity were trimmed between 2.3 per cent and 5.3 per cent, while the lowest risk portfolio saw no change in its UK equity exposure. Thesis has purchased some UK stocks with international exposure, including BAE Systems, ITV and National Express.

Paterson says UK equity markets have been boosted since the EU referendum due to large-cap overseas-earning companies and M&A deals, but he reckons uncertainty will persist in the market for some time.

Thesis has sold some retail stocks – such as Next and WH Smith – and slimed down weighting to financials.

“The hangover from the referendum is yet to be felt, reduced business investment and likely slower pace of hiring is still to come.”

“Add inflation to the mix, hurting real wage growth and we think the outlook for household spending has deteriorated. This is likely to have an impact on corporate earnings and certain sectors will continue de-rating.”

Elsewhere, the investment team has used the recent cut in interest rates to increase the minimum weightings in fixed income across all mandates.

“The post-referendum relief rally has seen a sharp increase in appetite for risky assets but perversely risk-off assets have not sold off significantly,” Paterson says, attributing it in part to the search for yield and hints of a further Bank of England interest rate cut.

“Sterling rates are likely to remain low for some considerable time so we’ve increased duration. It makes sense to shift some cash into bonds to gain yield.”

The company also also trimmed commercial property in its lowest risk mandates to lessen liquidity risk, but has added to its existing infrastructure exposure.

“Relatively strong yields will remain well-supported in a low-growth, low-interest-rate environment. The prospect of fiscal stimulus accentuates the investment case.”