The irony – the government is aiming to sell down its 28.7% stake in NatWest in the summer, but at the same time Coutts (owned by NatWest) is reducing fund allocations to the UK.
Going global – the funds have historically been materially overweight the UK, but will now be globally focused.
Material shift – this is a large (£2bn) transfer of assets from the UK to global funds, which reinforces the inexorable trend of outflows from the UK. To reverse this trend, we believe it is imperative that there is pension reform, a British ISA, and removal of stamp duty to encourage UK investment in UK assets.
What is happening
Coutts (part of NatWest) is changing portfolio allocation across six Coutts funds for both equities and bonds. Investors that do not want to experience these changes can withdraw their money and/or transfer it to another provider. This will need to be done prior to the benchmark change of 2 or 3 July, albeit it may trigger a CGT liability.
The new benchmark is the MSCI All Countries World Index ESG Screened Select Index. The regional exposure will be: North America 65%, Europe 13%, Emerging Markets 10%, Japan 6%, Pacific Basin 3% and the UK 3%.
Reason for the change
Coutts stated that the driver for the change is to increase diversification, as well as to improve long-term returns. There is also an expectation that there will be a reduction in future transaction costs. It also stated that it will reduce currency risk through greater diversification. Although this is correct in terms of global currencies, it will materially increase UK investors’ exposure to the dollar.
Impact of the changes
The funds involved have a combined market value of £9.8bn, which is split 62% equities and 38% bonds. The UK represented 33% of the equity portfolio at the last reported numbers, or 22% of total AuM. Taking the shifts in the portfolio, this will reduce to just 2% with an overall outflow of £1.96bn from the UK.
This represents a tiny amount of the overall UK market (0.08%), but it is very material in the context of current outflows. According to Calastone, the outflows from UK equity funds amounted to £8bn in the whole of 2023, so this news from Coutts represents a material increase in outflows in the short term. This will inevitably put further selling pressure on the UK market at a time when valuations are already depressed.
Below, we show the fund allocations and changes.
Figure 1: UK equity allocation (£m)
|
Total equities |
UK equities |
UK equities |
Latest UK weighting |
Fund size |
Change in UK |
|
|
Adventurous |
90% |
36% |
3.2% |
30% |
330 |
-89 |
|
Ambitious |
75% |
30% |
2.6% |
25% |
4,145 |
-928 |
|
Balanced |
55% |
22% |
1.9% |
18% |
3,851 |
-612 |
|
Cautious |
40% |
16% |
1.4% |
13% |
430 |
-51 |
|
Defensive |
25% |
10% |
1.0% |
20% |
273 |
-52 |
|
Managed equity |
100% |
40% |
3.5% |
32% |
799 |
-227 |
|
Total |
22% |
9,828 |
-1,960 |
All of the changes can be accessed on the Coutts website.
Outflows from UK equities
This continues the theme of globalisation in wealth management portfolios, which is resulting in continued outflows from UK equities. This is driving the vicious circle of depressed valuations and heightened M&A. This can be seen in the numbers from St James’s Place. Over the past decade, AuM have increased from £44bn to £179bn. However, as shown below, the level of AuM in UK equities has barely changed over the period.
Figure 2: St James’s Place AuM split
Source: Company accounts
UK equity AuM was £13.3bn in 2013 and rose to a peak of £21.5bn in 2021, before reducing to £15.7bn at the latest reading. This means that the allocation has moved from 30% in 2013 to 9% today, as shown below.
Figure 3: St James’s Place UK allocation
Source: Company accounts
We expect the level to move towards 5% as funds globalise and increasingly go into passives.
The trends are similar when looking at retail investment through Hargreaves Lansdown. The total of UK equities, UK Equity Income Funds and UK Small & Mid-sized companies funds (blue, green and yellow) have moved from c.50% allocation in 2015 to only c.30% by the end of 2023.
Figure 4: Hargreaves Lansdown split of AUA (ex cash)
Source: Company accounts, Peel Hunt estimates
If we do not have policies that encourage UK investment, then it is not surprising that there are outflows from the UK and that UK companies underperform.
