International investors have withdrawn from the UK in recent years, triggered by the Brexit turmoil and parliamentary disarray that followed. Now domestic UK investors seem to be rebalancing from UK into global equities. This has left UK shares friendless and significantly de-rated. Over the past 3 years the UK has been the laggard of the 12 largest developed markets. But the rebalancing may highlight opportunity.
Although the move looks like diversification, the bulk of global money usually ends in an expensive and narrowly-focused US market, rather than finding value in the Eurozone, Japan or emerging markets. And investor disappointment with the UK may be largely with tracker funds, which over 5 years have struggled. Despite the cost advantage typical of tracker, the median UK unit trust has outperformed comparable indices over the past 5 years, as shown by the more than 200 funds in the IA UK All Stocks grouping. The departure of many investors from the UK, exacerbated by the MiFID II impact on quality independent research, may have left more alpha available for active managers. It would explain the pattern over 5 years. A core and satellite model – mixing passive and active – may now begin to tilt more to active.
If there are problems in the UK market, the biggest issue has been its greater focus versus the US and Eurozone on traditional industries such as energy and banking. That is much less of a factor in mid-cap. Might a return to the UK on value considerations see active management play a bigger role?