UK equities | Feature
Andy Scott, a professional trustee at Dalriada Trustees, says that he is having fewer conversations about equities, con- cerning the UK and beyond. “As time hori- zons get pulled in, schemes are investing less in growth assets,” he adds. It is difficult to find evidence of a big con- sultant search for a UK equity mandate in the past two years. “We actually did one at the end of last year but there hasn’t been a huge amount of activity in domestic equities,” Drewienkie- wicz says. “People have definitely been going more global.” Not limiting your investment strategy to one market has clear advantages. Investors have access to some of the world’s most high profile brands, including Apple, Sam- sung, Toyota, Nestle, Amazon and phar- maceutical giant Pfizer.
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there are emerging markets, which are forecast to be a huge driver of the world’s economic growth over the next decade.
On top of that investors could bene- fit from China opening up as indexes increase their exposure to the world’s second largest economy. “Things like that can be a driver of alloca- tions,” Belgrove says.
As well as not adding currency risk to a portfolio, a benefit of UK inves- tors looking for listed stocks domes- tically is that they carry high stand- ards of governance and transparency. It also gives investors global exposure, as most FTSE members generate revenue from overseas.
The downside with London-listed compa- nies is that the index is weighted towards certain sectors, namely energy companies, such as BP and Royal Dutch Shell, as well as banks, which feature prominently in the top half of the table of stocks ranked by market value. HSBC, Lloyds Banking and Barclays all feature.
Brunel has given the trio of managers making investment decisions for its active UK equities fund the freedom to avoid matching the index and weightings to build a portfolio of stocks that could out- perform. That means a diversified portfo-
It all comes back to the fact that if we
have UK savers who are being paid in sterling, going to save in sterling and then spend in sterling, at the end of the day why would we have that floating currency risk going on all the time? Rob Booth, NOW Pensions
adds. “They think about currency expo- sure, their liabilities are in sterling and their assets are global. There has been more focus since the referendum, and indeed leading into the referendum, for pension schemes to think about their cur- rency exposure as a more relevant risk measure for them than typically the UK equity component.
“Brexit is only a concern on the currency side of things,” he adds. “On a global tremor basis, folk are more concerned about a broader economic slowdown, trade wars and China. Sentiment around those things are going to be the dominate drivers of 12 month returns than Brexit at that level.”
For Aon, its clients’ allocation to equities is nothing like it used to be. Institutional investors, therefore, want to spend their governance effort around active manage- ment in other areas, such as alternatives. It appears that the volatility we saw in pockets in 2018 would not be enough to tempt them back if it returns, as some pre- dict, this year. Volatility is often said to be an investor’s friend in that it creates entry and exit opportunities, but it might not be enough to tempt a few schemes into a few tactical trades in the UK equity markets. They have found new strategies, are focused on new markets and have new goals.
Issue 82 | March 2019 | portfolio institutional | 41
lio that is not concentrated on a few com- panies that dominate the market.
A QUESTION OF GOVERNANCE Belgrove explains that with the number of companies in the FTSE generating reve- nues overseas there could be currency sen- sitivities, and this could be where the big- gest concern over the UK’s departure from the European Union lies. “In a cap weighted way, the FTSE All Share or an MSCI UK allocation are dominated by some large global stocks. So even if you are invested in UK equities you are invested internationally anyway, rather than the local economy. All of these have dollar sensitivity.
“This where it becomes interesting for trustees in terms of how they can act,” he
So for those schemes that have a UK equity portfolio, are they following Brunel’s strat- egy of taking an active position? The answer, it seems, is ‘no’. “Given that it is a small allocation and it seems to be getting smaller, there appears to be a trend towards indexation,” Belgrove says. “That is governance led.” “It is about two things: cost management and governance. So if that proportion of your portfolio is not as significant as it used to be, it may not be worth the govern- ance effort. “We do see a desire for simplicity, for tracking. Choosing a tracker is still an active decision in its own right on a gov- ernance level,” he adds.
It is also worth pointing out that it is a lower cost option.
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