UK advisers continue to reduce domestic bias

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Natixis Global Asset Management’s (NGAM) latest UK portfolio barometer has found that UK advisers continue to fall out-of-love with the UK, as investor sentiment on the nation’s future prospects continues to decline. The portfolio barometer saw an uptick in the number of adviser portfolios reducing domestic bias in Q2 2017 – a continued change in heart from investment markets’ natural tendency towards home bias.

The UK portfolio barometer, which tracks and offers quarterly insights into the activity of 117 UK risk-rated model portfolios in the ‘Conservative’, ‘Moderate’ and ‘Aggressive’ categories, saw ‘Conservative’ baskets shift into multi-asset, absolute return strategies in recognition by advisers that fixed income, especially with a domestic bias, is likely to be lower yielding and higher risk when compared to previous years.

The Portfolio Research and Consulting Group’s (PRCG) data also found ‘Moderate’ models had a notable increase in fixed income – with flows into Global and European fixed income funds, the latter having a UK tilt.

Additionally, although exposures in ‘Aggressive’ models have been consistent in Q2 2017, the most significant change is the increase in global equity exposure within the equity asset class. PRCG notes that this is likely a continuation of a persistent theme of a reduction in domestic bias.

Andrew Kinsey-Quick, senior consultant, PRCG for Natixis Global Asset Management, said: “We have noted a reduction in domestic bias by advisers in recent quarters and this trend appears to be continuing, with reallocation from domestic to global equities.

Within the fixed income space we have seen some growth in domestic exposures but a more notable growth in non-domestic fixed income.”

“The reduction in domestic bias is positive as international assets should provide much-needed diversification in the event of the UK suffering a hard Brexit – from both currency in the short term and asset returns in the longer-term.”

The PRCG barometer also found flows into inflation-linkers, a favourite at the start of the year, cooled in the second quarter as advisers saw reason to pause in light of increased UK political volatility and signs of stabilisation or softening of recent economic data.

Especially within ‘Conservative’ models, the barometer found that advisers have reduced exposure to inflation linked fixed income and direct property and have allocated to Multi-alternative strategies that are classified as absolute return.

Kinsey-Quick said: “Despite the ramp-up in sales of inflation-linkers in the first quarter of this year, there has been a definite slowing down of inflows in the second quarter. In fact, it looks to be stagnating. Economic prospects for the UK are not as negative as first perceived after the Brexit vote, but the uncertainty facing the UK economy is still very much a concern. This has negative implications for Sterling against the Euro as a hard exit is likely to cause Sterling to weaken and stress economic conditions.”

Interestingly, the portfolio barometer also saw changes in sentiment towards direct UK property, with negative flows in June, despite positive flows in April and May. Overall this year, there have been outflows from direct UK property exposure and the PRCG notes a longer-term thematic change.