Canaccord shifts to UK mid-cap equities

Canaccord Genuity has increased its exposure to UK domestic-focused equities for the first time in six years after it boosted exposure to mid-cap stocks.

The discretionary manager has sold down its exposure to UK government bonds, or gilts, and completely sold out of a position in Asian equities to fund the move.

At the start of September, the Canaccord team divested its position in the £505.2m Schroder Asian Alpha Plus fund, run by Matthew Dobbs.

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Robert Jukes, global strategist at Canaccord Genuity, said he had sold the Schroders fund because the quantitative system that its discretionary risk enhanced multi-asset portfolios is run on saw a negative outlook for Asian equities.

The team replaced the position, which was 7 per cent in the balanced model, with a smaller exposure to UK mid-cap equities, making up 5 per cent of the balanced model.

Rather than pick an active fund for its mid-cap exposure though, Mr Jukes said the team bought into a FTSE 250 exchange-traded fund (ETF) from iShares.

Mr Jukes said he had gone for an ETF because it made it “easy to switch in and out of the position”.

He said he remained cautious on equities because the rally in markets seen in the past year had been driven by a re-rating in expectations and that earnings growth had actually declined.

Elsewhere, Mr Jukes said he sold out of a position in a UK gilt maturing in August 2018, which had made up a 4 per cent portion of the balanced portfolio, and used that money to partly fund an increase in its weighting to listed infrastructure investment trust Hicl Infrastructure.

The excess cash from the sale of the Schroders fund was also put into increasing its exposure to the Hicl trust, meaning Mr Jukes added 6 percentage points to the existing position.

Mr Jukes said there was still “a lot of appetite for infrastructure, which is delivering bond-like returns without the volatility”.

He said that while he did not think gilt yields were likely to go much higher in the next one or two years, adding that they had nearly reached a ceiling, the volatility in the bond markets witnessed in recent months meant it was necessary to diversify into similar asset classes within the risk-adjusted models.

The £1.4bn Hicl trust was one of the first infrastructure investment trusts set up in 2006 and has rapidly grown in size by buying new assets and issuing shares to satisfy increasing demand by investors.

The trust is currently sitting on a large premium to its net asset value of 7.3 per cent, according to data from the Association of Investment Companies (AIC). Mr Jukes said he would have preferred the trust was not on a premium but that it was still worth buying the shares for the consistent yield, which is currently 5.4 per cent, according to AIC data.