Global Investment Trusts Sell UK Stocks

Global equity investment trusts have halved their exposure to the UK market over the past decade - but they are missing out on income opportunities

David Holder 20 August, 2018 | 12:31AM

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Global equity investment trusts have significantly reduced their exposure to UK stocks in recent years, Morningstar data can reveal.

These investment trusts have typically been the cornerstone of private client portfolios over many years. This article will briefly discuss the magnitude of the change and potential reasons for this trend.   

Using the Morningstar Global Large Cap Blend category as a proxy we note that in May 2008 the category average exposure to UK equities was 19.9%. Fast forward ten years and the UK weighting now accounts for only 9.5% of the category average.

Wrong to Ignore UK Stocks?

The UK remains a key investment area for global investment trust managers. UK listed companies have material overseas earnings which provides substantial geographical diversification. In addition, corporate governance conventions and investor protections are strongly observed.

There is a long-standing culture of dividend payments. Indeed, many global investment trusts have very extensive records of consecutive years of dividend increase which may have been a historical reason for the UK bias and which points to the importance of distributions within overall investor returns.

According to the Association of Investment Companies, Silver Rated Bankers Trust (BNKR) has 51 years of dividend increases, Bronze Rated Alliance Trust (ATST) also has 51 years, Silver Rated Foreign & Colonial (FRCL) has increased dividends for 47 years, and Silver Rated Witan (WTAN) has increased pay-outs for 43 years.

Another less tangible factor may the home bias in that UK based fund managers will often naturally tend to gravitate towards the UK as a market that they and their investors know well. However as can be seen from the above figures there has been change in both the UK’s prominence in global indices and the propensity for managers to invest in UK equities.

Why are Managers Rotating Away from the UK?

There are a number of possible reasons behind this trend. There are around 50,000 globally quoted stocks but only some 2,000 of these are in the UK. There are naturally greater opportunities overseas and some sectors are not readily accessed in the UK for example technology is only 3% of the FTSE All share vs 18% of the FTSE World index, which can lead to greater portfolio diversification and investment opportunities within a broad range of sectors.

Overseas markets are also becoming an increasing source of dividends. Whilst the FTSE All Share yields 3.7% vs the 2.4% of the FTSE World the dividend paying trend is evolving overseas making overseas investment more viable for those investors seeking income.

Some investment trusts have been earlier to make these structural changes than others, but we would expect further evidence of this trend to continue at the margin, although tactically much will depend on the valuations and opportunities available within respective markets as to the timing of these changes.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Alliance Trust Ord718.00 GBX0.00
Bankers Ord811.00 GBX-0.49
Foreign & Colonial Investment Trust Ord663.00 GBX-0.30
Witan Ord996.00 GBX-0.10

About Author

David Holder  is a senior investment research analyst at Morningstar