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DFMs remain overweight UK equities despite recent shifts

The question of how much is too much to have in UK equities is one that is frequently discussed by DFMs, so we thought we would run some numbers to see the current state of play.

The data below shows the proportion of equity holdings (rather than proportion of total portfolio) held by DFMs on average in UK equities.

The comparison in the graph is with the MSCI World index and IA Global sector. 

One of the trends in recent years has been for DFMs to be gradually cutting back their exposure to UK equities.

Average exposure as a proportion of the whole portfolio has fallen from around 18 per cent in 2020 to 15 per cent at the start of 2023.

But the data shows that, in comparison, DFMs remain staunchly overweight. While UK equities are less than 4.69 per cent of the MSCI World index and 5.9 per cent of the IA Global sector, the average DFM exposure is 27 per cent. 

There are also overweights to European, Asia Pacific and Emerging Market equities, while the stark underweight to the US, which accounts for two-thirds of the MSCI World index and nearly half of the exposure in the IA Global sector.

US equities account for just 25 per cent of average DFM equity exposure.

Of course, given how starkly the FTSE 100 outperformed relative to US equities in 2022, and the fact the UK index hit an all time high this year, many DFMs may be patting themselves on the back for their prescience.

As the QE era ends, value stocks should enjoy a prolonged period in the sun. 

Others may point out that the FTSE excluding dividends hasn’t really gone up much over the past 20 years and that, from a financial planning perspective, most clients, by virtue of owning a property and (probably) being employed in the UK, are already “overweight” the UK, and so should use equity allocations to diversify away from that.

Conversely, owning overseas equities means taking currency risk, or incurring the cost of hedging. 

In the balanced portfolios of the allocators we cover, the average equity exposure is 55 per cent.

The DFM with the largest overweight to UK equities in their balanced portfolio is Morningstar, with 24.6 per cent. Mike Coop, that company’s chief investment officer, places high importance on valuation, and UK equities have for some time traded at P/E multiples below those of the US. 

The firm with the lowest exposure to UK equity funds in their balanced portfolio is Charles Stanley, with 4 per cent.

Charles Stanley is one of the DFMs to take an ‘inflation plus’ approach to its portfolios and it has a somewhat larger bond position than average.

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