As an area to invest, the UK has largely been out of favour with investors in 2021; although, according to the most recent Investment Association statistics in June, the IA UK All Companies sector saw net inflows of nearly £159m.
To put this into context, the first five months of the year saw outflows of nearly £790m from the sector as UK-based investors have generally preferred the comfort and safety of more globally-invested funds.
“We have been positive on the UK for some time,” said Chris Metcalfe, investment director at Iboss. “However, while the market has come along way since last October and it does still look cheap relative to other developed markets, we recently made the decision to trim a couple of percentage points off our exposure because it has come back.”
Time to shine
Despite a run of good performance and a reduction in exposure, Metcalfe remains confident there is still along way to go for UK companies.
“If you look at the UK relative to large parts of Europe or the US over the last decade, we still look a pretty poor specimen,” he said. “We are particularly optimistic for UK income funds, which have not really had a chance to shine yet.”
Despite the fact the IA UK Equity Income sector has witnessed outflows of some £2.37bn in the first six months of the year, Metcalfe said it is an area of the market he is bullish on,
“The dividends story is very complicated,” he said. “However, like we are seeing in both Europe and more globally, they are coming back in the UK and from an income perspective it is a region we are particularly bullish on right now, even though it has hurt our relative performance year-to-date.”
Lowered risk
Away from equities, an area Iboss remains underweight is UK Gilts. According to the IA in June this year the UK Gilts sector saw net retail inflows of £135.5m, while year-to-date the peer group has pulled in about £680m of UK investors money.
“Right now we think the risk/return profile for gilts is the worst it has ever been,” said Metcalfe. “As a result throughout this year we have continually decreased our gilt weighting, and we will be remaining the most bearish on gilts as we have been for the last 13 years.”
Indeed Metcalfe said it was the team’s decision to hedge its positions in both gilts and US treasuries and be underweight in the two assets, which helped its lower-risk model portfolios outperform in the first half of 2021.
“We said at the end of last year that all fixed income returns could be negative this year and this view has not changed,” he said.
