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Asset allocation: 7IM swaps European equities for US exposure

Seven Investment Management has slashed its exposure to European equities in its multi-asset proposition having been overweight on the sector for around two years. 

Falling concern over eurozone break-up means valuations are unlikely to have much more upside, according to 7IM investment manager Ben Kumar.

“In the past week or so we have been in discussion about the European overweight stance we have had for about two years and we were pretty happy with its performance prior to that,” he says.

The move has seen 7IM cut its European equities exposure from 9 per cent to 4 per cent.

“We saw a bit of dip in eurostocks and decided to have a look after the recovery. We have seen less belief that the eurozone is going to break up which people thought it was going to two years ago and with that no longer on the table, the upside seems to have gone.”

The surplus has been allocated to US equities which are increasingly attractive against the current political unrest in Europe.

Kumar says: “The US does not have a Putin or Ukraine to worry about and our US equity exposure is now up to 10 per cent. 

“Price to earnings ratios have remained fairly stable for about a year now and the latest GDP numbers show capital expenditure is up 8.4 per cent for the second quarter and consumer spending is up 2.5 per cent after personal consumption.

“That is a pretty impressive level of growth and enough to keep the US ticking over for quite some time. Exports are up 10 per cent so that shows the global appetite. Geographically, economically and politically it is looking pretty good.”

US holdings include the T. Rowe Price US Large Cap Growth Equity fund managed by Robert W. Sharps. The fund has returned 123.93 per cent over three years compared with an IMA North American sector benchmark of 100.08 per cent.

While increasing the US exposure, UK equity holdings remain fairly low at 13 per cent. This is an intentional move, according to Kumar, who questions the notion of UK stocks for UK investors.

“The FTSE 100 is a global index, so just overweighting it with rationale that UK investors buy UK stocks isn’t good theory or practice. 

“We are underweight in UK and a little bit more judicious with an overweight tilt towards the US.”

He adds investors should be wary of the fact that the FTSE is a globally-exposed index. “I saw a statistic recently showing 75 per cent of FTSE company earnings come from overseas, so what we are currently buying which is UK is actually 25 per cent of 13 per cent,” he says. “We are OK with taking global equity positions at the UK’s expense.”

The balanced portfolio has around 10 per cent exposure to emerging market bonds and whilst, like in other holdings, there are many passive exposures, the Ashmore EM Bond Total Return is a favourite.

Kumar says: “EM is an asset class we are happy to stick with and you get paid to stay in it longer term. The Ashmore fund is an active fund that our fund research partner Ibbotson Associates selected.

“Ashmore is an EM specialist and has got big weight relatively to frontier markets. 

“It is a speciality outfit with selection of EM corporate bonds – they have been doing pretty well and they are beating the market a little bit in the year to date.”

Another heavier allocation within 7IM’s multi-manager funds is towards private equity in which there is currently a 3 per cent weighting within the balanced portfolio.

The firm says the sector offers big growth opportunities, quoting the example of IP Group, whose share price has risen around 28 per cent this year.  “Private equity is an area we do like and we have exposure to that via listed vehicles and closed-ended funds. We have a 12 per cent weighting to PE in the adventurous portfolio and try to replicate that upside a little bit in the balanced offering.”

Exposure to global convertible bonds remains something 7IM is keen to increase through passive funds although currently there are no such funds available in the UK.

“The $3bn (£1.83bn) State Street SPDR Barclays Capital Convertible Bond is available in the US which is a tracker of convertible bonds. State Street is a big provider in the UK so we would like to see that product or something similar made available over here.”

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