James Carthew for Portfolio Adviser, 21 June 2023:
For many years, there was a tendency among UK-based investment managers and financial advisers to overweight domestic stocks within client portfolios. As a result, we saw a proliferation of investment companies with a narrow focus on UK-listed businesses.
Today, 54 investment companies have a listed UK equity remit although many of these are sub-scale and consolidation is needed. There are signs some rationalisation is underway – for example, Chelverton UK Growth, Crystal Amber and Abrdn Smaller Companies Income are in various stages of disappearing. On the other hand, new ones pop up, too – the latest addition to the sector is a £13m market cap trust, Onward Opportunities.
For international investors, the litany of excuses to avoid the UK is probably headed by Brexit – though feeble economic growth, political infighting and sterling weakness have also played a part. Whatever tops the list, however, it has been a fairly easy decision to have a zero weighting to the UK.
The UK makes up just 4.4% of the MSCI World Index and 3.9% of the wider MSCI All Countries World Index. Relatively few UK stocks offer sufficient liquidity to interest the big global managers. The domestic definition of small cap encompasses stocks far smaller than in the US – with small caps across the Atlantic more about the size of UK mid-caps. In addition, the UK market is skewed towards ‘value’ sectors, which until recently held little attraction for most investors.
The result is that UK stocks have ended up being very cheap relative to international peers. The team at Redwheel, managers of Temple Bar Investment Trust, reckon the UK market was valued at about a 40% discount to developed-market peers at the start of the year. In addition, within the investment companies market, the underperformance has often been amplified by widening discounts.
Narrow concentration
The UK does look to have perked up since the start of last year but its improved performance has been concentrated in a narrow group of stocks. Small and mid-caps have lagged, while micro-caps remain very much out of favour. This has played a significant part in the underperformance of many UK-focused funds over the past year and a bit.
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