One of the longstanding debates over the last four years has been on what the appropriate percentage weighting should be allocated towards UK equities within a balanced portfolio. Many of our client portfolios have historically been overweight in UK equities, as compared against the UK market’s allocation on the world index, due to their dividend attractions as well as the need to match clients’ sterling liabilities.
However, since the EU referendum in 2016, UK shares, as measured by the FTSE All Share have underperformed world equities by 70% at the time of writing. Dividend pay-outs and the weakness of sterling since the referendum have led to this wide variance of returns. The abundance of ‘old economy’ heavy weight sectors (banking, oil & gas and tobacco) and the lack of technology companies representing the ‘new economy’ have magnified this underperformance in 2020.
Many investment managers have significantly reduced their exposure to UK equities over the last few years; however, I believe that after four years of relative underperformance, the UK market may be the surprise market of 2021 if we see a co-ordinated economic recovery next year. The FTSE 100 is trading on a cyclically adjusted price earnings ratio of under 10x and has been one of the worst performing markets in 2020. Over the last month, post Biden’s win and the vaccine news, the UK has outperformed global equities as investors price in a cyclical recovery next year. I am looking at maintaining a 30% exposure to the UK market across balanced portfolios, with exposure across the market cap sizes.
Performance of the balanced portfolios that my team manage have been helped by the significant weighting towards US equities and we have been shifting more of our equity exposure into Asia over the last few years and I see us moving more into direct Chinese funds over the next 12-24 months. The balance of economic power has been moving East for some time, however the effects of the pandemic are accelerating this move and China could be the big beneficiary of it. We have been reducing our European exposure and repositioning our emerging markets exposure away from South American, Emerging Europe and Frontier markets into emerging economies within the Asia basin.
We tend to have about 10-15% of a balanced portfolio invested in alternative asset classes to provide some ballast as well as more attractive returns to what some fixed interest markets are offering today. Five years ago, the alternative asset classes we used tended to be property and commodities to provide some diversification away from equities and fixed interest. Today, our alternatives exposure has expanded to include multi-asset funds, smart beta products, defined return funds, renewable infrastructure funds and gold. Blended together in the right way, as well as keeping an eye on ongoing costs, this portion of the models has been producing a RPI +2-3% return profile over the last 3 years.
Freddy Colquhoun, Investment Director
The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance is not a reliable guide to future returns.