Model portfolio providers (MPP) reduced their exposure to UK equities in the second quarter of 2024, analysis from ISS Market Intelligence (MI) has revealed.

Its data showed that despite the decreased exposure to UK equities, MPPs increased their overall allocation to equities as they sought to boost returns in Q2.

On aggregate, MPPs reduced their weighting towards the UK All Companies sector, with its share of gross sales into model portfolios falling by 1.1 percentage points in H1 2024 as performance lagged other markers, particularly the US.

In the 12 months to 10 October, the FTSE All-Share returned 10.1 per cent, compared to the 33.6 per cent return from the S&P 500 during the same period.

However, despite their relatively weak performance, UK equities maintained a “significant” weighting in model portfolios in Q2, accounting for an average of 8.1 per cent of gross sales into model portfolios, the fourth highest share of any sector.

Although MPPs reduced their sales weighting of UK shares, they increased their overall equity allocation by 4 percentage points in Q2, with 60 per cent of model portfolio gross sales directed towards equity funds.

“The shift out of UK equities in favour of other regions by UK model portfolio providers, particularly the US, is driven by both performance disparities and portfolio managers taking a global perspective to portfolio management,” commented ISS MI EMEA research leader and lead author of the report, Benjamin Reed-Hurwitz.

“What matters today is relative return opportunities between and amongst asset classes. While UK returns have been positive, they have consistently lagged other regions, with US equities delivering returns that are nearly three times higher over the last year. This trend isn't new, but the real question is whether these relatively outsized US returns can continue, especially given the lofty valuations across the pond.

“Despite this shift, it's important to note that UK equities still represent a significant portion of model portfolios [for UK model portfolio providers]. This equity home bias likely reflects two factors: first, that many investors find comfort in maintaining exposure to their domestic market; and second, that portfolio providers still see compelling opportunities in UK stocks.”

The equity sectors with the largest gains were unclassified (+3.9 percentage points), global (+1.7 percentage points), and North America (+1.2 percentage points).

All other asset classes saw an allocation decrease in Q2, with the biggest impact for UK gilts (-2.5 percentage points) and global mixed bond (-0.8 percentage points).

“While many agree that bonds are becoming a more attractive option now, as yields remain attractive and interest rates fall, there's still some hesitance to increase allocations,” Reed-Hurwitz said.

“This caution likely stems from continuing uncertainty over the path of interest rates, leaving the potential for future surprises.

“However, if inflation continues to decline and equity markets remain expensive, we could see model portfolio providers shift more towards bonds in the near future.”

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