It’s fair to say that Asset Allocator paid varying degrees of attention to Jeremy Hunt’s Budget yesterday, but our interest was especially piqued by the introduction of the UK Isa after several months of rumours.
The basic premise – to encourage flows into a battered UK stock market – seems innocuous enough, though implementing it in practice looks to pose some real headaches for Treasury bods and the wider investment sector.
Given our fund selecting specialism, we wanted to find out to what extent DFMs are rallying to the government's call to believe in Britain.
Well, to a certain extent they already do.
Despite the MSCI World only allocating 4 per cent to the UK and the MSCI All Countries World (which of course includes emerging markets) allocating 3 per cent, our allocators are already expressing a strong home bias, Ukisa or no Ukisa (yes, that acronym looks and sounds rubbish - drop us a line if you have better ideas).
Their average weighting to UK equities is 13 per cent, plus an added average weighting to gilts of almost 3.5 per cent, totalling 17.5 per cent overall.
They also back Britain more than global equity fund managers who have an average exposure of 7 per cent to the UK.
In today’s accompanying article, you can read more about the rush into gilts.
Though the UK Isa may encourage more retail flows, we’re struggling to see how much further the allocators in our database could go in overweighting the UK any more than they do already.
Laith Khalaf, head of investment analysis at AJ Bell, warned against being too enamoured by the domestic market.
“Sentiment can lead you astray when investing, including a desire to favour the domestic stock market out of loyalty,” he said. “It’s also questionable whether this loyalty is rewarded when some of the biggest companies in the market aren’t terribly British, such as Antofagasta, a mining company operating predominantly in Chile, or HSBC, a global bank which derives 80 per cent of its profits from overseas.”
And Richard Philbin, chief investment officer of investment solutions at Hawksmoor, questioned the concept.
“Ultimately, what is the definition of a ‘British’ company? For example, pretty much the only thing British about British Petroleum is the word ‘British’. After all, oil is priced in USD, the company pays dividends in USD, the extraction of oil (one of its primary businesses) doesn't come from Great Britain,” he said.
“Should the focus be on smaller companies, or companies that have the most employees in Britain for example? Would the government have done more good by removing stamp duty or making dealing equities cheaper?”
If the government is focusing on smaller companies, then there can be some movement - the majority of portfolio managers have no specific allocation to UK smaller companies funds and the average allocation is less than 1 per cent. But of course whacking up allocations to smaller companies comes with risks attached.
And ultimately exposure to the UK has been falling for some time, and the UK Isa less likely to reverse that trend than, say, an uptick in the performance of UK equities themselves relative to markets such as the US.
Philbin added that it posed a significant issue for investment trusts, particularly those with no UK operations, such as Fidelity China Special Situations.
Though naturally the AIC is pushing for the 350-plus investment companies, regardless of their portfolio composition, to be included in the Isa.
The same issue arises in the funds industry, where managers will hope this could spur an influx of capital into their struggling mandates (it is perhaps notable that the some of biggest voices in favour of the UK Isa were fund management companies with large UK equity fund ranges).
For instance, the best-performing fund picked by our allocators in 2023 was Artemis UK Select, but it largely comprises the various multinationals parked in the FTSE, with oil giants Shell and BP, plus private equity firm 3i Group as its top three holdings.
And for those DFMs seeking a broad exposure to the market for clients, it’s likely they’ll go for the iShares Core FTSE 100 ETF, which has recently become the most popular UK growth fund in our database with eight owners.
