UK Model portfolio providers (MPPs) reduced their exposure to UK equities in the second quarter despite hiking their overall allocation to equities in a bid to boost returns, new data from ISS Market Intelligence (ISS MI) reveals.
The data shows that MPPs in aggregate reduced their weighting towards the UK All Companies sector as the sector’s share of gross sales into model portfolios fell 1.1 percentage points in H1 as performance lagged other markets, most notably the US.
In the 12 months to 10th October, the FTSE All-Share returned 10.1%, less than a third of the 33.6% that the S&P 500 returned.
Despite their relatively weak performance, UK equities maintained a significant weighting in model portfolios in Q2, accounting for 8.1% of gross sales into model portfolios on average – the fourth highest share of any sector.
While MPPs decreased their sales weighting of UK shares, they increased their overall equity allocation by 4 percentage points in Q2, with 60% of model portfolio gross sales directed towards equity funds.
The data comes from ISS MI’s UK Model Portfolio Sales Report, which draws on adviser platform data to unpick the market structures, trends and opportunities at a firm, model provider and fund level.
Benjamin Reed-Hurwitz, EMEA Research leader at ISS MI and lead author of the MPS Report, says: “The shift out of UK equities in favour of other regions by UK model portfolio providers, particularly the US, is driven by both performance disparities and portfolio managers taking a global perspective to portfolio management. What matters today is relative return opportunities between and amongst asset classes. While UK returns have been positive, they have consistently lagged other regions, with US equities delivering returns that are nearly three times higher over the last year. This trend isn’t new, but the real question is whether these relatively outsized US returns can continue, especially given the lofty valuations across the pond.
“Despite this shift, it’s important to note that UK equities still represent a significant portion of model portfolios [for UK model portfolio providers]. This equity home bias likely reflects two factors: first, that many investors find comfort in
maintaining exposure to their domestic market; and second, that portfolio providers still see compelling opportunities in UK stocks.”
The equity sectors with the biggest gains were Unclassified (+3.9 percentage points), Global (+1.7 percentage points) and North America (+1.2 percentage points).
Within the Unclassified sector, which contains many offshore funds, the big equity winners included several program specific equity building blocks, such as RBC Brewin Dolphin’s MI Select funds, and a number of offshore based iShares and Dimensional products.
All other asset classes saw an allocation decrease in Q2, with the biggest impact for UK Gilts (-2.5 percentage points) and Global Mixed Bond (-0.8 percentage points).
Reed-Hurwitz adds: “While many agree that bonds are becoming a more attractive option now, as yields remain attractive and interest rates fall, there’s still some hesitance to increase allocations. This caution likely stems from continuing uncertainty over the path of interest rates, leaving the potential for future surprises.
“However, if inflation continues to decline and equity markets remain expensive, we could see model portfolio providers shift more towards bonds in the near future.”
