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Domestic upheaval

The global growth open-ended sector is skewed heavily towards domestic markets but the same cannot be said these days of the equivalent closed-ended portfolios. The huge generalist, international and global growth funds have historically featured majority weightings in the UK.

However, the position has altered radically, with the lowest position in the domestic market of a global investment trust as of the end of May being zero compared with more than 50 per cent at the end of May 2006, according to the Association of Investment Companies. Two years ago, just 10 trusts out of 26 in the global growth sector had UK weightings of less than 50 per cent. Of those 10, seven had allocations between 20 and 45 per cent. The lowest UK position among trusts in May 2006 was the 14 per cent weighting in Monks.

Fast-forward a couple of years and the picture has pretty much reversed. Just eight portfolios out of 31 in the global growth sector now feature a weighting to the UK of more than 50 per cent, with nine trusts having less than a quarter of their portfolios exposed to the domestic equity market.

The move to lower UK positions seems to be quite an aggressive stance from one group in particular, says Nick Greenwood, chief investment officer at Iimia, now part of the Miton Optimal group. He points out that Baillie Gifford’s four funds in this sector have among the lowest UK positions. Monks has 13 per cent, Edinburgh Worldwide has zero, Mid Wynd has 16 per cent and Scottish Mortgage has 10 per cent allocated to the UK. Edinburgh Worldwide manager Mark Urquhart says: “Recent economic data suggests that at best the UK economy is slowing rapidly and at worst it is entering a recessionary period brought on by the excesses of the previous decade when money was freely available to all. If present conditions continue, growth and earnings’ forecasts for many companies will suffer. With costs increasing for energy and food, it is likely that UK retail stocks will be among the hardest hit as consumers pull back on the amount they spend on goods such as clothes and electrical items.”

Overall figures allocated to the UK market may look low now but in reality they may be even lower than they appear. Greenwood says many holdings may be UK-listed but their business is conducted elsewhere. For example, he notes that one of his biggest holdings is in Artemis alpha, which is considered a UK position because it has a big weight-ing in UK small caps. However, its top 10 stocks are all international companies and the trust has a solid exposure to the oil and gas sector in companies such as Salamander which operates in South-east Asia.

Such is the geographic change among managers looking for more global opportunities that the statistics cannot reflect exactly where they are allocating these days, other than that it is away from the domestic market. The AIC’s traditional geographic division of international funds is between the big positions of the past – the UK, Europe, North America, Japan and the Pacific. There are some changes in allocation to each of these areas but none is as stark as the reduction in UK positions. The overflow classification of “other” seems to be where today’s managers are placing more importance.

The weightings now allocated under “other” reflect the increasing importance of emerging areas not really covered by the typical geographic segmentation. For example, in May 2006, 15 portfolios had exposure in the “other” category, 13 of which were weightings under 12 per cent. Today, 21 trusts have weightings in the “other” category. Sixteen of those trusts have a weighting of less 12 per cent but there are five with weightings above 16 per cent and the highest position is 29 per cent.

Greenwood thinks it is a good move for more trusts to operate internationally. He points out that investment trusts need to obey the law of the jungle and if they do not perform, they can be forced to move or change.

Performance these days tends to come from regions outside domestic equities and even Western markets.

Greenwood says it is hard to determine where money is being allocated these days, as many international managers are making sectoral calls, such as playing the resource shortage.

Urquhart says: “Due to the economic growth of nations such as China and India, it is anticipated that energy stocks will continue to perform well through the economic downturn that many Western economies are experiencing. However, some energy companies will perform better than others. Two which may outperform their peers are Petrobras and Gazprom. Although classified as emerging market stocks by virtue of their location, they are two of the biggest companies in the world. Importantly, both have greater proven reserves and lower extraction costs than the traditional energy majors.”

Scottish investment trust senior investment manager James Kinghorn is playing this theme in his trust. He says: “We have a big position in the oil and gas industry and this is split between oil and gas producers and the oil and gas equipment and services names. The equipment and services companies are benefiting from the rising capital expenditure requirements of producers. Producers need to drill more wells and are being forced to do it in more challenging locations as they attempt to maintain oil and gas production levels.

“This trend is likely to last many years as oil demand will continue to rise, given emerging market growth, and oil supply is constrained by limited new finds and many years of under-investment.”


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