Investors lose their appetite for UK exposure within AIC global sectors

However, the jury is out on whether their departure from the homeland has played to their favour in terms of performance.

In 2001, only three trusts of the 29 within either the AIC Global Growth or AIC Global Growth & Income sectors had less than 20% exposure to the UK, according to figures from the AIC and Morningstar produced for Investment Week

Today the reverse is true with just six of 22 within the sectors, which were renamed in 2013 to Global and Global Equity Income, above 20%. 

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Nick Britton, head of intermediary communications at the AIC, explained: “Benchmarks in the global sectors have become increasingly international in the past 20 years. In the past, it was not uncommon for a UK index to be a significant component of the benchmark for a global investment company.”

One trust that has significantly reduced the UK exposure of its benchmark, and hence trust, is the £2.3bn Witan investment company. Its benchmark was 60% UK until 2004, 50% until 2007, 40% until 2017, 30% until 2020 and is now just under 20%.

“Like other global investors, for many years we were able to continue with a higher weighting in the UK market when the UK economy’s waning global importance was justified because the market consisted mainly of global businesses, whose sales were mainly abroad,” explained Andrew Bell, CEO of Witan.

“There were the added benefits that the UK’s listing rules and accounting system were familiar, transparent and viewed as giving better investor protection than others,” he added. 

However, as time moved on the UK became more concentrated in relatively mature sectors and comparatively low growth companies even within the higher growth sectors, according to Bell.  

At the same time, the governance regimes in other regions improved. 

“This made people more willing to invest in the investment opportunities in those regions. The US, even though a mature market, developed leading positions in the high growth biotechnology and internet sectors. 

“So, the UK became duller while the rest of the world became safer or more interesting,” he said.

Home bias

However, investment considerations were not the only reason that trusts decided to turn to a more global benchmark. 

According to Bell, wealth managers and private individuals started doing stockpicking themselves for the UK part of their portfolios and turned to global trusts to supplement it. 

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“Over time, the shareholder base that companies such as Witan, Foreign & Colonial and others cater for moved to prefer to have genuinely global exposure rather than simply have a lot of UK exposure, even though the UK market has a lot of indirect global exposure,” Bell explained. 

Britton agreed investors’ preferences have changed. 

“Twenty years ago, a global portfolio based on a core allocation to a UK investor’s home market would have had broader appeal, especially for dividend-focused investors. 

“Now, the global portfolio is more likely to form the core, with a broad choice of UK-focused investment companies available for those who want a larger allocation to their home market.”

Performance impact

It appears the shifting of allocation from the UK has paid off when it comes to performance. 

Since 2001, the sectors have outperformed the FTSE All World index and the MSCI World returning about 445% each compared to 397% and 295% for FTSE All World index and MSCI World index respectively, according to figures from FE fundinfo.

However, drilling down into the timelines for the shifts the results are less clear.  

The Global Equity Income sector saw a pronounced shift in UK exposure from December 2015 to December 2016 with its allocation to the nation dropping from 38.7% to 19.2%. 

Tracking the performance from January 2017 to September 2021 it does not look as if that change paid off as the sector returned less than both the MSCI World and the FTSE All World, according to FE fundinfo. 

The Global sector on the other hand hovered around 30% UK exposure from December 2007 until December 2019 when it dropped down to mid to low 20%. 

The Global sector’s retention of greater UK allocation appears to have played in its favour as it outperformed both indices and the Global Equity Income sector from January 2017. 

UK confidence

Today two trusts remain above 50% allocation to the UK – Lindsell Train and JPMorgan Elect Managed Growth at 77.1% and 53.1% respectively. 

Lindsell Train’s figure, however, is inflated by its stake in fund management business Lindsell Train Limited, and once that is removed it stands at 23.7% as of March 2021. 

Katy Thorneycroft, one of the named managers on the JPMorgan fund, said their decision is strategic as UK equities look “generally attractive” because they are cheap when compared with other markets while offering a sizable dividend yield.  

“We currently prefer to allocate to trusts which are higher beta, which offer more of a domestic play on the UK economy, as we expect earnings growth to continue to be strong in 2021,” she added. 

At the moment that overweight is paying off as the £311m trust is outperforming the MSCI World, FTSE All World and both global sectors year-to-date, according to figures from FE fundinfo. 

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