British equity weightings crept upwards in the Balanced and Cautious Adviser Fund index benchmarks during the May rebalancing. While respective increases of two and one percentage points were hardly indicative of strong adviser appe-tite, they halted a pattern of declining exposure to British-listed stocks across the AFI series.
Between May 2006 and May 2010, panellists roughly halved their allocations to domestic equities in the aggressive, balanced and cautious benchmarks. The cuts were most savage in the balanced index, where British equity exposure fell by 22 percentage points – including a 12-percentage point decline in 2008.
Fixed income and overseas equity allocations rose across the indices, meanwhile – a reflection of the increasingly uncertain macroeconomic backdrop and growing adviser appetite for emerging markets exposure. The “international equities” portion of the aggressive index doubled during the period from 9 per cent to 18 per cent.
Not all AFI panellists joined the rush overseas, however. Allenbridge director of fund research Jonathan Wallis says emerging markets investing has been “quite a theme” and he is upbeat on the region’s prospects. But he prefers to get geographical diver-sification indirectly, through British-listed companies. Wallis maintained his aggressive British allocation at 60 per cent in May – well above the AFI average of 25 per cent.
He says: “It has been a long-term position and broadly in line with the Association of Private Client Investment Managers and Stockbrokers’ indices.
’A lot of British companies get a substantial proportion of their earnings from abroad. We have taken the view that you are getting international exposure through UK companies’
“A lot of British companies get a substantial proportion of their earnings from abroad, so that is why we have tended not to alter that allocation too much. We have taken the view that you are getting international exposure through UK companies.”
AWD Chase de Vere investment research manager Justine Fearns also kept her British allocations steady in May. Fearns expresses a similar view to Wallis and points to companies such as Pearson, which is British-listed but which generates some of its revenue from teaching English online in China. “Pearson is just one example – there’s plenty more where that came from, listed on the UK stockmarket,” she adds.
Wallis and Fearns both favour stockpicking managers for their British equity exposure – a stance adopted by other AFI panellists. Advisers added several bottom-up funds to the indices in May, while awarding higher weightings to previously-selected holdings with a similar investment style.
Fearns says that, unlike 2006 and the second half of last year – when company valuations rose almost irrespective of quality – market turbulence will bring stockpicking managers back to the fore in 2010 and 2011. She says: “With volatility comes opportunity. If you hold a stockmarket index, you hold everything in it, including the highly-priced things that don’t have a good business outlook. A stockpicker can ignore those bits – hopefully to generate outperformance.”