A better performance for the pound in recent months has seen investors move back towards UK mid and small cap funds, according to data from The Share Centre.
Funds invested in the stocks of smaller UK firms suffered the starkest sell-off in the aftermath of the European Union referendum vote on 23 June 2016.
They took a hit from fears that, being more domestically-focused than their larger rivals which benefit from international earnings, they would lose out to the uncertainty following Britain's vote to exit the European Union.
But monthly flows data for September from The Share Centre noted increased investment into mid and small cap funds. The fund platform does not release specific numerical data, but said mid and small cap funds were among the most bought on its platform.
While around 70 per cent of the assets of the FTSE 100 are generated overseas, it is about 50 per cent of the FTSE 250.
Sheridan Admans, investment manager at The Share Centre said the increase in investor interest in the FTSE 250 is a “show of confidence” in the UK market.
The mid and small cap funds most bought by investors on The Share Centre’s platform are the £3.1bn Old Mutual UK Mid Cap fund, run by Richard Watts, and the £1.2bn Old Mutual UK Smaller companies fund.
Old Mutual UK Mid Cap is the absolute top performer in the IA UK All Companies sector over the past three and five years.
The UK Smaller Companies fund has returned 80 per cent over the past five years, compared with 53 per cent for the average fund in the IA UK Smaller Companies sector in same time period.
Mr Admans said: “It also appears that investors are continuing to look away from the more reliable larger companies and opting for exciting new companies that offer growth opportunities.”
However Anthony Rayner, who helps run £770m across three multi-asset funds at Miton, is skeptical of the investment case for UK equities and takes the view that “home bias” is responsible for this surge of cash, with investors in all areas of the world tending to have more invested in their own market than they should.
He said: “At the moment, we have a small exposure to the UK and the vast majority of that is to large multi-nationals, rather than domestically focused businesses.
"The rationale for this is driven by Brexit. There are undoubtedly some excellent stock picking opportunities in the UK but from a top-down perspective , which is how we view the world, the outlook is dominated by uncertainty around what the Brexit vote will actually mean.
"This is blurring visibility for the UK economy and UK financial assets, and therefore colouring the relative risk/reward. As we aren’t constrained by indices, and endeavour not to be constrained by our emotions, we look to opportunities with better risk/reward profiles outside the UK.”
Philip Milton, who runs Philip Milton & Co, an advisory firm in Devon, said: “I do believe that sterling is fundamentally too low so therefore indeed, I am bringing home overseas’ profits gradually and slowly and skewing strategies for a more home-based opportunity.
"Of course, if that UK company exports most of its wares and just happens to sit in the mid and small cap space, that won’t be so good longer term but for now it should be making hay whilst the sun shines.
"That said, the small and mid cap sectors have had a great run already.
"Companies like Capita, Pearson, Glaxo and so on are pretty good value so it is wrong to label them all as being over-priced simply because they are in an index."
david.thorpe@ft.com
