UK equities drop out of favour among UK model portfolio providers

New data from ISS Marketing Intelligence (ISS MI) revealed UK model portal providers (MPPs) have decreased their exposure to UK equities in Q2 and looked to other regions for better performance.

The data indicated that MPPs reduced their exposure towards the UK All Companies sector as its share of gross sales into model portfolios fell by 1.1 per cent in H1.

ISS MI’s UK Model Portfolio Sales Report also found that the UK’s FTSE All Share generated 10.1 per cent in returns for the 12 months to 10 October 2024, compared to the 33.6 per cent returns generated by the S&P 500 in that same period.

However, while UK equities may have dropped out of favour with MPPs, the data showed that they increased their overall equity allocation by four per cent in Q2. Around 60 per cent of model portfolio gross sales were attributed towards equity funds.

“The shift out of UK equities in favour of other regions by UK model portfolio providers, particularly the US, is driven by both performance disparities and portfolio managers taking a global perspective to portfolio management,” Benjamin Reed-Hurwitz, EMEA Research leader at ISS MI and lead author of the MPS Report, said.

“What matters today is relative return opportunities between and amongst asset classes. While UK returns have been positive, they have consistently lagged other regions, with US equities delivering returns that are nearly three times higher over the last year. This trend isn’t new, but the real question is whether these relatively outsized US returns can continue, especially given the lofty valuations across the pond.

“Despite this shift, it’s important to note that UK equities still represent a significant portion of model portfolios [for UK model portfolio providers]. This equity home bias likely reflects two factors: first, that many investors find comfort in maintaining exposure to their domestic market; and second, that portfolio providers still see compelling opportunities in UK stocks.”

The report found the equity sectors that reported the largest increases were ‘Unclassified’ – mainly made up of offshore funds – at a 3.9 per cent increase, Global up 1.7 per cent and North America up by 1.2 per cent. Within the Unclassified sector, several iShares and Dimensional funds based offshore saw outperformance in Q2. At the other end, UK Gilts and Global Mixed Bond saw drops in allocations (2.5 per cent and 0.8 per cent, respectively).

“While many agree that bonds are becoming a more attractive option now, as yields remain attractive and interest rates fall, there’s still some hesitance to increase allocations. This caution likely stems from continuing uncertainty over the path of interest rates, leaving the potential for future surprises,” Reed-Hurwitz said.

“However, if inflation continues to decline and equity markets remain expensive, we could see model portfolio providers shift more towards bonds in the near future.”