Commenting on the Investment Association’s June fund flow data, Hollands was particularly struck by the massive “thumbs down” given to UK equities by retail investors.
Although it was a record shattering period for the fund industry as a whole, as net retail sales reached £2.9bn for the month and £18.4bn for the first half of 2017, the IA’s data painted quite a different picture for UK equities.
While fixed income products saw net retail sales of £1bn, the IA’s UK All Companies, UK Equity Income and UK Smaller Companies sectors were the worst three sellers of the month, haemorrhaging a combined total of £1.1bn.
Hollands suspects that the “daily diet of gloomy warnings” around Brexit and the UK’s fragile political situation is to blame for retail investors distrust of the asset class.
But by shunning UK equities, they are also cutting themselves off from gaining exposure to regions with superior earnings and growth prospects, like emerging markets and the eurozone, he argued.
“Whatever one’s views on the outlook for the UK economy, the shunning of UK equities undoubtedly reflects a common confusion among investors between where listed companies are domiciled and where their underlying economic exposure actually is – as these are two very different things,” he said.
“It is perhaps not widely understood that the relationship between domestic UK growth and UK stock market is extremely tenuous as the UK stock market is highly international in nature, with the FTSE 100 in aggregate having more revenues exposure to both emerging market regions and Continental Europe than it does to the UK.”
Tilney’s most highly rated UK funds, from Nigel Thomas’s AXA Framlington UK Select Opportunities fund to the JO Hambro UK Opportunities fund and Hugh Yarrow’s Evenlode Income fund, all generate an estimated 60% of their earnings from overseas.
One of Tilney’s favourites, the CF Lindsell Train UK Equity fund, which counts multi-national large caps like Diageo, Unilever and Relx as its three largest holdings, derives around 70% of its revenue from overseas earnings.
“In fact, the high exposure of UK equities to overseas markets means that some of the perceived negative outcomes of Brexit uncertainties, notably sterling weakness, actually benefit UK-listed companies with international earnings,” Hollands added.
“The shunning of UK equities therefore seems unwarranted.”