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Investors urged to be cautious on UK equities

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Fund managers and advisers are calling for caution on UK equities, with some raising cash levels significantly as political risks persist.

Within its Balanced fund, Seven Investment Management (7IM) has raised its cash weighting to 12%, its highest level since just before the European Union referendum in June last year.

“We see plenty of flashing amber signals for the UK economy, and risks ahead as Brexit negotiations get underway in earnest,” explains Alex Scott, deputy chief investment officer at 7IM. “However UK shares have continued to make progress – helped of course by their high exposure to overseas assets.”

However, in the absence of a repeat of last year’s boost to foreign profits from the fall in sterling, and with uncertainty ahead for domestic profits, Scott says the firm is worried that UK equity valuations – which are near all time highs – do not fully price in the risks.

As such its funds are raising cash and adopting an underweight stance in the UK as Scott says they see better value in other equity markets around the world.

“This can be uncomfortable in ‘risk on’ markets, but as conviction investors with a focus on delivering target returns over the medium term, we have to have the courage to do what we believe is right,” says Scott.

Another fund raising cash levels is the SWMC UK fund, managed by Brian Cullen. The fund manager explains: “We saw a golden opportunity in the aftermath of Brexit to take advantage of some of the fears in the market – and as a result we added substantially to holdings in the house builders and some other cyclical parts of the market.”

Flash forward 12 months and Cullen says while he sees nothing particularly “ominous” on the horizon, whereas he was buying shares approaching 50% off its estimates of fair value last year, today many are trading at closer to 80-90% of their fair value.

“We would rather take the cash and try to reinvest in more compelling opportunities,” he says. “With markets having performed strongly year-to-date, we feel comfortable entering the summer with this relatively higher level of cash as there will inevitably be further volatility and opportunity ahead.”

Funds to hold

Juliet Schooling Latter, research director at Chelsea Financial Services, says she would be more cautious investing a lot of money into the UK equity market today.

“It is on the expensive side and, while it could very well continue to rise in the short-term, a correction of some sort would not surprise me either,” she says. “In these conditions I would favour funds investing in UK equities that aim to make money when markets rise, but also when they fall.

“Three of my favourites in this respect are Henderson UK Absolute Return, Smith & Williamson Enterprise and Threadneedle UK Extended Alpha. The first two are long/short targeted absolute return funds while the third is a more core UK equity fund that has the ability to short stocks if the manager believes it will add value.”

7IM meanwhile still has some favoured UK plays for the multi manager range, and remains invested in the Majedie UK Focus fund.

Commenting on the fund, Tony Lawrence, an investment Manager at 7IM, says: “Like us, Majedie are not afraid to step back from the herd. They hunt up and down the market cap spectrum for ideas, stamping their own individual style on each sub-portfolio and blending them together to produce something distinct.

“This approach enables us to use them as a primary building block in all our risk profiles and we have been well-rewarded over the years for doing so. They are currently holding large positions in UK supermarkets and oil majors, two industries that have been deeply maligned over the last few years, which is testament to the contrarian nature of their thinking.”