Wealth portfolios sniff out UK fund bargains; A hitch in selectors' search for promising payouts
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Country club
There may be some light at the end of the tunnel for UK equities – or so some wealth managers are starting to think. Such attitudes are still in the minority, but our analysis of model portfolio shifts in January show that UK exposures have begun to creep higher again.
For the third month in a row, UK equity weightings increased at the start of this year. This rise has been iterative rather than dramatic: most wealth firms instead stuck with existing allocations in January, and one or two big name DFMs are still paring back exposures to domestic shares. Nonetheless, one in four discretionary balanced portfolios did increase their positions.
By contrast, US exposures dropped back fractionally for the first time in several months– underlining that UK increases aren’t simply a result of all equity allocations drifting higher due to rising markets.
Those interested in the UK are still at odds with the wider retail fund market. We noted earlier this month that Morningstar data showed a particular dearth of UK equity fund inflows in January; subsequent analysis from the data provider revealed a total of £2.3bn in net redemptions from the asset class on the month.
With sentiment still divided, there will be plenty of twists and turns to come regarding equity positioning this year. Nonetheless, intra-regional shifts could prove the name of the game for the rest of 2021: bond markets have growing problems to deal with, and alternative assets still form a relatively small part of portfolios.
For most of those tasked with producing capital growth, equities remain the only game in town. The growing interest in thematic and global equity funds isn’t going anywhere soon. But with the US market showing signs of greater volatility, regional equity plays will be given careful consideration by fund selectors in the months ahead.
Income switch
After a month in which we’ve discussed the prospects for UK equity income on a number of occasions, it’s only fitting that February should end with some notable news in this part of the investment universe. Francis Brooke will be stepping back as manager of Troy Trojan Income at the end of this year, after 17 years at the helm. Brooke will be staying at the company as non-executive chairman, but the news might still complicate things for or two holders.
Co-managers Hugo Ure and Blake Hutchins are no newcomers to UK equity income investing – and Ure has spent 10 years on the fund already. But Brooke was known for his particularly prudent income investing, and that cautious approach has enjoyed greater interest from DFMs in the past year. As of the start of 2021, Trojan Income was second only to Threadneedle UK Equity Income when it came to inclusion in DFM model portfolios, according to our fund selection database.
Even prior to the pandemic, Brooke had spoken of hunkering down and planning for dividend growth tomorrow rather than today. That arguably meant the manager was ahead of the curve when 2020 payout cuts came through.
Even if the new managers stay the course, there are a couple of questions for DFMs to ponder. The portfolio has plenty of bond proxy exposure, which likely helps explain its recent downturn in performance. But the revisions made last year also involved getting rid of banks and oil and gas exposure: major payouts in these sectors may not be returning in a hurry, but some UK fund buyers will be loath to abandon them entirely. Sensible succession planning will reassure holders, but come the end of the year, changing market dynamics may have already shaken up the strategy's future prospects.
Data points
Nikhil Rathi has kept a relatively low profile since taking over at the FCA last year – at a time when his predecessor Andrew Bailey has faced increasingly uncomfortable questions about events of years gone by. But a series of announcements today point to Rathi’s priorities: making “fast and effective decisions”.
That’s an intention which has no doubt been strengthened by recent criticism over delays to its report on Woodford Investment Management, among others. In the regulator’s defence, its focus was understandably shifted due to the pandemic last year. The case for the prosecution can point to myriad other issues, however.
So today's new roles, which include the first head of data and inaugural head of authorisations, also emphasise the FCA has much to do to stay on top of the changing shape of financial services and the rise in fraudulent activity. Some of these issues are structural, rather than simply requiring the arrival of a new broom – but either way, Rathi will know they can’t simply be swept under the carpet.
