Despite a perceived weak economic outlook and the FTSE 100 suffering its worst year since 2007 with a 14% decline in 2020, the Liontrust multi-asset team is increasing its weighting to UK equities.
As part of its strategy of favouring cheaper equity markets; including Europe, Japan and Asia/emerging markets, rather than the expensive US, Liontrust said it is now “increasingly comfortable” with the UK as well.
Having been neutral on UK equities for much of last year, growing vaccine optimism led the multi-asset team to adopt an overweight stance in November, while it also upped its exposure to small caps as the end of the Brexit transition period approached.
“We see the UK as a solid bounceback candidate for the simple reason that if we get a strong economic recovery, global investors will look for areas that have underperformed in the hope of a bigger rebound,” says Jen Causton (pictured), a fund manager on the Liontrust multi-asset team.
Less uncertainty
Causton says the signing on Christmas eve of the Brexit trade agreement could be enough on its own to spark a rebound as UK equities mean revert.
“While the full ramifications of leaving the EU will only become clear in the months and years ahead, the deal struck was symbolic enough to lift the prevailing cloud of uncertainty,” she says.
“Our positive view of the UK, however, largely hinges on vaccine success, with the country potentially benefitting more from an efficient rollout as it has been harder hit,” she adds. “We know news flow around this will continue to be volatile; nevertheless, the UK was early to order and, currently, is reported to be on track to meet the government targets.”
If Covid-19 cases, mortality and hospitalisations continue to fall, leading to the ending of the lockdown, Causton notes the UK will look more investable, especially at what she termed “current attractive valuations”.
“Once global investors have confidence in a recovery, it is natural to seek more risk and buy beaten-up stocks, of which the UK has many,” she says. “M&A also started to pick up last year and we would expect this to continue, both from international players and well-capitalised UK names.”
Strong pound and a lack of tech
It would seem global fund managers are starting to agree, to an extent. In its February global fund manager survey, the Bank of America Merrill Lynch revealed that while UK equities remains the most underweighted region by managers, optimism is steadily rising with the percentage of managers wanting to be overweight increasing.
Such a stance was rewarded in February, with three of the five top performing sectors being UK-invested. While the IA UK Smaller Companies sector topped the rankings with a gain of 3.8%, both the IA UK All Companies and UK Equity Income sectors also produced positive gains of 2.8% and 2.6%, respectively.
“Various factors helped; firstly, a strong pound, and secondly lack of tech companies,” says Ben Yearsley, investment consultant at Fairview Consulting. “You can also add the return to the dividend roster of many of the UK’s biggest companies especially the major banks, which have all restarted dividends.”
While the strength of sterling does not, of course, necessarily help UK equities directly, Yearsley says what it does do is diminish the value of overseas holdings.
“Likewise, with technology stocks having a tough end to February the lack of exposure in UK markets helped on a relative basis,” he says. “Finally, the other key factor for UK markets was the rebound in the oil price and strong results from the commodity sector.”
Small cap success
However, while UK retail investors have been returning to UK small caps since October last year, recent figures from the Investment Association showed there remains little love for UK All Companies or UK Equity Income funds.
With outflows of £319m and £399m respectively, they were the sectors with the largest redemptions in January, bar the IA Short-Term Money Market sector.
In terms of getting exposure to the UK, Causton says the Liontrust multi asset team owns the Majedie UK Equity Fund for its “quality value” style, with the managers willing to hold international companies.
“We also hold JOHCM UK Equity Income, which has a strict yield requirement and has tended to be overweight in small-cap domestically focused companies over the last few years,” she says. “From the same asset manager, we hold JOCHM UK Dynamic, an all-cap fund that has strict criteria around when it will buy companies (there must be some evidence of self-help commencing) and controls around sectors for diversification purposes.”
Balancing these, the Liontrust multi asset favours Lindsell Train UK Equity and Evenlode Income for what Causton calls “high-quality” growth.
She says: “Both held up well last year through their exposure to companies with proven track records of generating high and consistent returns on equity, typically consumer staples, select media names and financials (ex-banks and insurers), as well as businesses embracing and using tech to their advantage.”
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