UK equity managers have moved to their lowest weighting to UK stocks in three years, ahead of the EU referendum.
Data from FE Trustnet shows that managers in the IA UK All Companies and IA UK Equity Income sectors have cut UK equity allocations to 89.86 per cent – the lowest level since July 2013. Funds in both sectors must have a minimum of 80 per cent in UK equities.
The allocation compares to an average of 92.81 per cent over three years and a high of 95.03 per cent in July 2013.
More managers have moved to take advantage of the 20 per cent allocation allowed in overseas equities, as defined by the Investment Association’s sector rules.
Of the 340 funds in the two sectors, 12.4 per cent now have less than 85 per cent of their assets in UK equities.
“There are a number of funds in the two sectors that have historically taken advantage of their ability to allocate 20 per cent of the fund to overseas equities. Nevertheless, the study has found that many more managers in the sectors have since opted to move their capital away from FTSE-listed stocks as the vote has drawn nearer,” says FE Trustnet’s Alex Paget.
The Schroder Recovery fund currently has the lowest allocation to UK equities, at 78.1 per cent, however the managers say the fund has always had a low UK exposure. The fund is followed by the Liontrust Macro Equity Income fund, which has 80.27 per cent in UK equities, and Neptune Income with 80.35 per cent in UK stocks.
Jamie Clark, co-manager on the Liontrust Macro Equity Income fund, says: “We have long held the view that the prospects for the UK domestic economy were weak, particularly when compared to the US.
“We haven’t made any specific changes to our investments based solely on the prospect of a Brexit. However, given sterling’s current weakness, we maintain our long-standing preference for overseas earners in our portfolios and are taking full advantage of our capacity to hold 20 per cent in non-sterling investments.”
However, FE says it may not just be Brexit fears driving managers away from the UK, but also concerns about dividend cuts.
The UK Equity Income sector has a lower weighting to the UK at 89.23 per cent, compared to 90.49 per cent for the UK All Companies sector.
“There has also been a lot of concern over the outlook for the UK’s dividend market,” says Paget.
“There has been a swathe of dividend cuts in the FTSE All Share as earnings growth has fallen in recent months, leading to lower dividend cover at a time when pay-out ratios have increased.”
Alan Dobbie, fund manager for the Rathbone Blue Chip Income and Growth fund, one of the largest holders of overseas stocks in the sector, says: “The overseas allocation has been relatively constant over recent months and years and is not EU referendum-related. The fund is very concentrated with around 30 stocks, and we use our overseas exposure, up to a maximum of 20 per cent, to complement our UK holdings.”