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The UK equity funds for a weaker pound

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24/09/2014
Renewed dollar strength has led forecasters to predict a tougher time for sterling in the coming months, despite a small relief rally last week as Scotland opted against independence. Which funds could benefit?

Having hit a five-year high of $1.71 against the dollar in early July, sterling now stands 4 per cent lower at just under $1.64.

Despite the prospect of a UK rate rise in early 2015, some economists suggest a resurgent dollar and continued political risk ahead of the UK general election will weigh on the pound.

The UK equity funds most vulnerable to a falling currency would be those with the highest exposure to small and mid-caps.

Meanwhile, those funds with a high proportion of international holdings or holdings in FTSE 100 companies, which generate most of their earnings from outside the UK, should benefit.

Ben Willis, head of research at Whitechurch Securities, said: “Generally speaking, UK the small and mid-caps tend to be hurt by weaker sterling, and UK large and mega caps will have a tendency to generate overseas profits in foreign currency – usually US dollars (e.g. BP, Shell), which will benefit from weaker sterling.”

Funds in the IMA UK All Companies sector must invest at least 80 per cent of their assets in UK equities, but many are taking advantage of the 20 per cent permitted allocation to overseas stocks.

Below, Your Money’s sister publication Investment Week has put together a list of funds from the sector with the lowest UK equity allocation, using data from FE.

Majedie UK Focus

This £474m fund managed by Chris Reid, James de Uphaugh, Chris Field and Matthew Smith has returned 10 per cent over one year to 17 September versus a sector average of 5.7 per cent.

The managers have a 15.2 per cent allocation to international stocks, while 60.8 per cent of the fund is invested in FTSE 100 companies.

Newton UK Equity

The £1bn fund managed by Richard Wilmot has performed in line with the sector over the past year, but has seen performance picking up particularly over the past six months (up 3 per cent versus a sector average return of just 0.7 per cent).

The manager allocates 17 per cent to overseas markets, with 11 per cent in the US and the rest in Germany, Switzerland and France.

R&M UK Equity Long Term Recovery

Hugh Sergeant’s £173m fund also has a heavy allocation outside the UK, with nearly 19 per cent of the fund invested elsewhere, including Europe, North America and Japan.

The fund, which invests in companies expected to undergo a recovery over time, is up 14 per cent versus the sector average over the year.

Schroder Recovery

Another recovery fund managed by Kevin Murphy and Nick Kirrage, this one is up 7 per cent over the year and is in the first quartile over three years, returning 88 per cent versus a 48 per cent sector average.

The manager has just 82.2 per cent invested in the UK market, with 12.1 per cent invested in the US, Europe and emerging markets and 5.7 per cent in cash.

Majedie UK Equity

In a similar vein to its UK Focus fund and managed by a similar investment team, Majedie’s larger £2.7bn fund also invests a high proportion of assets – 13.6 per cent – outside the UK, and has 65 per cent in the FTSE 100.

The fund has also outperformed the All Companies sector, albeit slightly lagging the smaller Majedie vehicle, returning 7.2 per cent over the year.

Fidelity Special Situations

Alex Wright’s £2.8bn fund has continued to underperform the sector over the past year, after he took it over from Sanjeev Shah, returning just 2 per cent.

However, the new manager has been turning around the holdings and the fund’s 16.6 per cent allocation to stocks outside the UK may well benefit its performance.

Invesco Perpetual Income/High Income

Both of Neil Woodford’s former funds, now managed by Mark Barnett – the £6.8bn Income and £12.6bn High Income – also invest over 15 per cent of their assets outside the UK.

Both funds have returned over 11 per cent over the year, beating the sector average.

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