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Asian persuasion
UK fund managers are getting swept along with the Asian growth story, taking advantage of the international flavour of the domestic index to gain higher weightings to emerging markets. The result is that UK investors are likely to be more exposed to emerging markets than they realise, particularly if they have also invested in the region directly.
It is easy to get high weightings to overseas earners, considering the global nature of UK-listed companies, particularly in the commodity, oil and gas and pharmaceutical sectors. One statistic often cited is that two-thirds of the earnings from FTSE companies are derived from overseas. That is not too hard to believe, considering that the top five stocks in the FTSE 100 make up around 30 per cent of the market and yet each have less than 10 per cent of their earnings coming from the UK, according to one fund manager.
Financials has always been a dominant sector more geared to the domestic economy but it has not been a popular place for investment of late. Within this sector, there are two stocks that many still favour -HSBC and Standard Chartered, which both derive much of their earnings from Asia. In February, it was reported that while UK banks cut £6.1bn in shareholder payouts in 2009, HSBC only cut modestly while Standard
Chartered increased its distribution.
It should not be too much of surprise that UK managers are weighting their funds to companies exposed to highergrowth areas. No one is denying the UK economy and consumers are under considerable pressure while regions such as China are booming. China’s fourth-quarter GDP growth exceeded 10 per cent compared with the UK’s 0.3 per cent growth.
Investec director Jeremy Gardiner says he can understand the appeal of managers seeking out companies exposed to Asia. He says: “Developed market equities have not moved as much as emerging markets so to get exposure to that growth, that is exciting.”
Most of the top-five best-performing funds in the UK all-companies sector over the three years to March 5 have big weightings in the overseas sectors - commodity, mining and pharmaceuticals. HSBC, Royal Dutch Shell, Glaxo, BP, BG, Vodafone, Unlilever, Anglo America are among the top 10 stocks in the top-performing Majedie UK equity fund. The top 10 holdings account for more than 54 per cent of the fund’s assets although cash is included in the top 10 positions of the fund with a 5.4 per cent weighting.
Majedie UK focus, ranked second in the sector, also has many of these firms in its top 10 as well as First Quantum Minerals. The third-ranked
M&G recovery fund also has First Quantum in its top 10 holdings as well as companies such as HSBC, Tullow Oil and African Minerals. L&G UK Alpha is ranked fifth in the sector over three years. Among its top 10 positions are companies such as Hutchinson China Meditech, Coal of Africa, Prudential, Rurelec (a Latin American power generation firm) as well as BP and BG.
Considering the increased global nature of FTSE companies, it is almost impossible to avoid overseas exposure in a domestic fund. In fact, it could be argued that an emerging markets portfolio could easily be created from London-listed companies. But with the trend towards the East coupled with the bleak domestic outlook, the weightings to overseas earners is getting higher.
It is not just the bigger companies that are multinational. Smaller companies have always been considered geared more towards the domestic economy but even managers in this space are now featuring high weightings to foreign earners.
Henderson smaller companies investment trust manager Neil Hermon says: “Within the portfolio, more than half of the sales in the underlying companies are derived overseas, with a heavy bias towards Asia and other emerging markets at 18 per cent of the portfolio.”
Despite this dominant theme, there are some top-performing managers who still like the look of the domestic market on a stockselective basis.
Standard Life Investments equity unconstrained fund manager Ed Legget is ranked fourth in the UK all companies sector over three years to March 5, according to Trustnet statistics. Legget says he has been contrarian to the theme of overseas earners and is overweight the more domestic sectors such as property, construction and retailers while modestly underweight oil and gas and commodities. “The UK consumer is under pressure but that does not mean there are not domestic companies that will do well,” he says.
He says the question of being long on emerging markets or domestic earners is increasingly having to be addressed by UK managers when
constructing their portfolios. “As the UK market becomes more global, you have to be more attune to what is happening outside the UK than you perhaps had to 10-15 years ago. What happens in China has a big impact on a big part of the UK market.”
Investors themselves are showing this preference with foreign equity market interest on the rise. Standard Life Investments head of mutual funds Jacqui Kerr says: “We are seeing greater diversification of portfolios. The majority of gross sales are still in equities but there are higher
weightings outside the UK compared with 10 years ago.”
Statistics from the IMA back this up. Although domestic mandates still dominate sales, there has been a noticeable increase in fund flows to foreign equity portfolios since 2005. In December 2005, the UK all companies sector accounted for more than 28 per cent of funds under management while Asia ex Japan was 3.4 per cent and global emerging markets made up 1.6 per cent. Growth since then has not been meteoric, especially considering fluctuating asset values over the past five years, but by the end of 2009, the UK all companies sector accounted for less than 20 per cent of funds under management, Asia ex Japan grew to 4.7 per cent and global emerging represented 1.8 per cent.
With the theme of UK managers leaning towards Asian earners and investors heading in that direction, their investments may just be more heavily exposed to the fortunes of China than to what is happening domestically. With this trend continuing, advisers are going to need to look under the bonnet of funds and check closely what managers are doing to ascertain the risks that such exposure may bring.
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