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Why multi-asset managers are divided on UK equities

Why multi-asset managers are divided on UK equities

The FTSE 100 recently hit a record high of more than 7,840 points. What has driven this and is there still value in UK equities?

Paul Parascandalo, multi-asset manager at Aviva Investors, attributes the rise to a rallying oil price rise and strong US dollar. ‘The oil and gas sector, which is 17% of the large cap index, has delivered a stellar performance of nearly 25% in the last three months,’ he said.

Meanwhile, Camilla Ritchie, senior investment manager at Seven Investment Management, added UK large caps should continue to benefit from strong global growth. This is because 75% of the revenues of FTSE 100 companies comes from abroad.

She pointed out the UK economy, by contrast, is still sluggish. But Ritchie added: ‘There’s a value case, as some pessimism following the EU referendum result may have been overplayed.’

Favouring mid caps

Ritchie took advantage of volatility in February to add FTSE 100 holdings and push UK equity exposure to neutral. She said FTSE 250 positions were topped up late last year on valuation grounds and argues UK mid-caps look good value relative to large caps.

But Nick Watson, a multi-asset manager at Janus Henderson, is less sanguine; he is not adding to his UK equity exposure, given recent UK stock market hikes. Even so, he thinks there are still opportunities: ‘This is an environment for active managers to identify UK unloved companies with underappreciated earnings streams or temporary negative news flow.’

Watson said the UK offers an ‘attractive’ yield, which is important for income investors. ‘It also offers a wide range of sector and style exposures,’ he added. ‘We can allocate between these to deliver returns for clients.’

He believes UK equities are disliked because of Brexit uncertainty, risks from a change in government, and the relative lack of tech growth stocks. ‘This gives us comfort there’s plenty of scope for underweight investors to rebuild their positions at some point,’ Watson pointed out.

However, Justin Onuekwusi, multi-asset fund manager at Legal & General Investment Management, believes there is value in UK equities. But he is concerned about concentration levels. ‘The top 10 stocks of the FTSE All Share make up more than 35% of the overall index,’ he said. ‘So this market is not particularly well diversified.’

Global opportunities

Moreover, Onuekwusi believes you can invest more directly in the factors that have driven UK equity performance. ‘We benefited from being positive on global energy stocks rather than investing in just those domiciled in the UK,’ he said.

Meanwhile, Parascandalo thinks there may be better investment opportunities outside the UK. In particular, he thinks global growth and trade will remain robust in the medium term.

‘Our multi-asset funds take a global approach to asset allocation,’ he said. ‘So the starting weight for UK equities is fairly small.’

In a similar vein, David Vickers, senior portfolio manager in multi-asset at Russell Investments, is underweight UK equities. He says you must look at their longer term track record.

‘UK outperformance has been fleeting and the FTSE 100 has lagged global equites by 25% in the last five years,’ he said. ‘But the lag is 50% if unhedged.’

Vickers currently favours emerging and European equities over both UK and US equities. ‘Despite seeing some value in UK equities, stronger sterling could negatively impact returns,’ he said. ‘Furthermore, Brexit uncertainty and recent subdued economic growth is marginally negative.’

So, despite the FTSE 100’s strong performance, it seems the smart money might be going elsewhere.

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Related Fund Managers

David Vickers
David Vickers
116/141 in Mixed Assets - Balanced GBP (Performance over 3 years) Average Total Return: 8.75%
Justin Onuekwusi
Justin Onuekwusi
44/141 in Mixed Assets - Balanced GBP (Performance over 3 years) Average Total Return: 16.34%
Camilla Ritchie
Camilla Ritchie
75/141 in Mixed Assets - Balanced GBP (Performance over 3 years) Average Total Return: 13.24%
Paul Parascandalo
Paul Parascandalo
25/141 in Mixed Assets - Balanced GBP (Performance over 3 years) Average Total Return: 19.83%
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