Flows into UK equities will increase next quarter following 13 months of negativity, according to our recent asset allocation survey.
Although the data shows that key funds saw considerable outflows in Q3 and Q4 2017, investors are set to increase holdings in Q3 2018, citing reallocation to new funds. Other reasons for the change in sentiment include overblown Brexit pessimism and good economic fundamentals.
According to the research, 41% of fund selectors plan to increase allocations into UK equities over the next quarter, 39% will hold allocations, and 19% will decrease allocations. This compares with Q1 when just 19% of respondents said they would increase, while 55% said they would hold, and 26% said they would decrease.
The data also showed that UK equity and UK equity income have seen net outflows of £2.5bn and £7.6bn over the last 13 months, the largest of all the asset classes.
Last Word Research says: “It looks like the sell off, much of which has come from a small number of troubled funds [such as the LF Woodford Equity Income Fund and the Invesco Perpetual High Income Fund] might have prompted our respondents to find another vehicle and reinvest their money. This is a potential sales opportunity for fund groups.”
Alternatives to Woodford Equity Income
One beneficiary of the sell off has been Hugh Yarrow’s TB Evenlode Income fund which grew by £66m in June, according to data from Morningstar, the month the asset allocation survey was conducted. Woodford’s Equity Income Fund lost £217m in the same month.
Jupiter Merlin and Architas are among the multi-manager funds that ditched manager Neil Woodford (pictured) in H2 2017 and allocated to Yarrow’s more defensive strategy instead, bolstering Evenlode’s inflows.
Charles Stanley Direct pensions and investment analyst Robert Morgan says: “Evenlode is a good obvious alternative to Woodford’s Equity Income Fund. It has the capacity, a strong track record, and it is relatively small. It also has more of a global focus which is attractive when sterling is weak.”
Tilney managing director Jason Hollands explains that he took the Woodford fund off the company’s buy list in March but increased holdings of UK equities by 1.3% over the last quarter primarily due to attractive valuations. He said: “TB Evenlode is one of our key UK holdings alongside the likes of Liontrust Special Situations, Lindsell Train UK Equity and JOHCM UK Dynamic.”
Investment Quorum CIO Peter Lowman argues that institutional houses that have dropped Woodford will be attracted to good value UK stocks. “Institutional investors tend to be more valuation disciplined and many UK stocks are undervalued just now,” he says.
Brexit mispricing hits UK equity valuations
Chelsea Financial Services research analyst Ryan Lightfoot Brown explains that although the sell off will have contributed to increasing inflows to UK equities, it is only part of the story.
A more important trend, he argues, is the mispricing of UK stocks in the face of Brexit uncertainty. “Brexit has prevented many investors playing in this space. It now looks pretty unloved,” he says.
Lightfoot Brown is taking a contrarian approach and has increased allocations to Henry Dixon’s Man GLG UK, which looks at mid-cap FTSE 250 stocks as well as some larger FTSE 100 stocks.
Chelsea FS has also increased allocations to Alex Savvides, who manages the JOCHM UK Dynamic fund favoured by Tilney, and Investec contrarian manager Alastair Mundy. “This guy says he looks in other people’s dustbins. He’s on the search for stocks that have dropped 50% to see whether other people are missing value,” Lightfoot Brown says.
Whitechurch Financial Consultants managing director Gavin Haynes is most interested in the mid-caps space and has increased allocations over the last six months by 10% from 20% to 30% of overall holdings both because the sector is undervalued and because euro strength has prompted reallocation.
Haynes describes himself as positive relative to consensus on UK equities.
He says: “We use fund managers that take a stock by stock approach (Henry Dixon at Man GLG and Abeforth Smaller Companies). The company also uses the Schroders Income Maximiser which invests in undervalued areas such as financials.”
Affinity Private Wealth director Russell Waite is also positive on UK equities compared with his peers. “We see many world class companies in mid caps,” he says. Waite recently upped allocations to UK equities in his high-risk mandates by 5% and trimmed allocations to tech.