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UK allocations leave little wiggle room for fund buyers; Allocators' seeds of doubt resurface

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Wealth managers haven’t fully bought into the idea of the great UK revival - but some domestic equity allocations have been creeping higher since December. That relative caution looks wise in retrospect: hedge fund managers who took a more aggressive view have already been caught out by the UK market’s underwhelming start to 2020.

For DFMs, the UK remains just one piece of the puzzle, particularly when it comes to their balanced portfolios. A year or so ago we looked at the spread of UK equity allocations in those portfolios, but it can also be useful to put those positions in context. So the chart below details how much of a given wealth manager’s overall equity weighting is accounted for by UK funds. As the graph indicates, opinion is pretty split:

As well discussed earlier this month, overall equity allocations still sit just above the 55 per cent mark. Today’s figures show UK positions typically account for around a third of this total. The median weighting is also similar, at 34 per cent - though there are plenty of outliers on either side.

Clearly, UK equities have spent at least 18 months out of favour - could there be scope for further increases in future? That would seem reasonable enough. But a closer look at our previous chart, from 2018, shows that the spread of UK allocations looks remarkably similar to today’s data.

The two datasets aren’t quite comparing apples with apples - one is absolute figures, the other a proportion of overall equity holdings. Nonetheless, they suggest there’s only limited scope for a material boost to UK allocations from hereon in. 

Seeds of doubt

Another apparent blow to the idea of market efficiency arrived overnight with Apple warning iPhone supplies would be “temporarily constrained” due to the coronavirus. The company’s shares dropped in premarket trading as a result, as did its suppliers and Asian benchmarks.

That reaction looks like one in the eye for those who claimed that markets were effectively looking past the impact of the virus - believing that a temporary shock to supply chains would be followed by an equally swift rebound once normal service was resumed. 

The more bullish will point to the relatively muted nature of the overnight falls, and emphasise that Apple wasn’t simply stating the obvious. Analysts told the FT that the magnitude of the impact was “clearly worse than feared”, given how quickly the company has established it would miss revenue guidance for this quarter.

It will take more than this to derail the tech rally, so allocators won’t be jumping out of their seats just yet. But the accompanying economic data this week does indicate the underlying economic problem is more serious than first anticipated.

European companies may be impressing on the earnings front, but the nascent recovery on the continent might be in doubt: German business confidence dropped significantly this morning. Japanese GDP, meanwhile, was worse than feared in Q4 - ie before supply chain concerns even materialised. Much more of this and even loose monetary policy won't be enough to sate investors’ concerns.

Strife begins at 40

Apple's dip won't have much of an impact on even the most aggressive tech portfolio - actively managed ones, at least.

But some investors will feel an effect: those who hold the Technology Select Sector ETF, run by SPDR in the US. It currently has some $28bn in assets, making it the standout player among tech trackers.

More to the point, the runaway success enjoyed by both Apple and Microsoft in recent years means the ETF now has an incredible 40 per cent of its assets in these two companies alone. This is a concentration risk unknown to Ucits investors - and one that makes every jolt to these stocks a serious issue.

Holders do have the cushion of a near 50 per cent rise in their investment in 2019 alone. But neither that bounce, nor the volatility that comes from such concentration, is likely to teach them much about true investing. UK buyers should be grateful there isn't (yet) a popular equivalent on these shores. 

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