It has been a long-running trend that exposure to UK equities in portfolios has been gradually going down. It now sits just above 13 per cent.
But Momentum Global Investment Management, or MGIM (not to be confused with MGM, the big lion), is one of those backing Blighty through thick and thin.
A brief glance under the bonnet shows they have a 36 per cent exposure to the UK, equities and gilts combined. Their equity-only side exposure is an eyebrow-raising 23.5 per cent in their balanced portfolio.
By way of comparison, only a handful of allocators in our database - about 15 per cent - have an allocation to UK equities above 20 per cent.
This means Momentum has the largest exposure to the UK of any of the allocators in our database so we thought we'd ask them about it.
Now it's of course worth bearing in mind that the MSCI ACWI has an exposure to 3.37 per cent so these allocations are all significant overweights to the market - but this of course makes Momentum's positioning seem all the more stark.
Indeed the folks at Momentum are concerned that US equities are showing a ‘worrying’ lack of breadth at the moment with the UK and Japan, in comparison, trading at discounts and offering healthy dividends.
“UK equities remain the conviction valuation call with the UK remaining the cheapest developed market,” Momentum has said. “There is little obvious catalyst to re-rate, but the attractive earnings yields continue to draw in private and overseas buyers.”
Buying something just because it’s cheap may not always prove the best idea (Lidl chicken breasts exist as proof) but Mark Wright, portfolio manager at MGIM, thinks the UK’s unpopularity over the past few years has provided a good entry point to the market.
“There’s definitely been more positive rhetoric towards UK assets recently and the value they offer compared to 12 months ago,” he said. “UK assets are so out of favour with international investors, allocations by those investors cannot get much lower. This means that the UK equity market doesn’t need much of an improvement in sentiment for it to motor.”
Where is Momentum sourcing its UK exposure?
A good question. Its largest domestic holding is Jupiter UK Smaller Companies. Momentum are the only holders of this fund in our database, with most others opting for Chelverton UK Equity Growth, held by six allocators.
Momentum does, however, opt for Redwheel UK Equity Income, a modestly sized but relatively popular offering that’s fast becoming a favourite in the income sphere.
It picked up two new buyers at the back-end of last year. and now sits in the basket an impressive seven DFMs. They also hold Schroder Recovery which is another relatively popular fund in our database.
Addressing Momentum's chunky exposure to a UK smaller companies fund, Wright said: "Following years of underperformance, the UK is one of the cheapest major markets in the world right now and especially the small- and mid-cap part of the market where we are more heavily invested.
“UK economic growth has been far from stellar over the last five years but it is not true to say that corporate earnings have also been weak. They have actually been solid, helped by the international diversity of those earnings.”
Indeed UK valuations may have led to a relatively richer hunting ground for active management through which our DFMs can benefit. Last year 47 per cent of our allocators’ picks beat the FTSE All-Share benchmark across 2023, compared to just 15 per cent in 2022.
