When it comes to UK equity funds, investors are generally aware that the market they pick stocks from can be pretty international in flavour. But they should also bear in mind a tendency of some fund managers to dabble in markets beyond their main remit. Investment Association sector criteria generally allow open-ended regional equity funds to put up to a fifth of their assets into overseas shares, while the rules can be somewhat looser for investment trusts.
This means that if you buy a fund focused on the UK or another specific region, you may be getting a little of other markets too. This isn’t necessarily a bad thing: it can allow a manager to play trends or sectors not easily accessible in their own market, for example. But it’s worth being aware of so you can monitor your underlying holdings and overall portfolio asset allocation.
When it comes to UK funds, I recently mentioned Liontrust Income (GB0032325093) holding Visa (US:V) and Microsoft (US:MSFT) in the absence of exciting tech exposure closer to home, and the fund is not alone here. City of London Investment Trust (CTY) manager Job Curtis has, for example, held the likes of Microsoft. More recently, the team behind Royal London Sustainable Leaders Trust (GB00B887YV76) initiated a position in a popular tech-related stock Taiwan Semiconductor Manufacturing Company (TAI:2330). They argued that demand for semiconductors was “set to only increase over the longer term, driven by trends such as the electrification of vehicles and increasing sophistication of consumer electronics”. The fund had 16.2 per cent of its assets in overseas shares at the end of March.
A quick perusal of UK funds and investment trusts suggests that a fair few names share this international zeal. Fidelity Special Situations (GB00B88V3X40) had a whopping 19.7 per cent of assets in stocks listed in the likes of Ireland, Europe, the US and Australia at the end of April, with French pharma stock Sanofi (FR:SAN) among its top 10 holdings. For context it should be noted the fund’s total assets slightly exceeded 100 per cent, potentially due to use of derivatives. M&G Recovery (GB00B7759Y38) also appears heavily exposed, with 16.7 per cent of assets outside the FTSE.
Others dabble, too, if to a lesser extent. Law Debenture Corporation (LWDB) had 11.2 per cent of assets outside of the UK at the end of April. Invesco UK Equity Income (GB00B1W7HL55) had 10.5 per cent of assets outside the UK, with a similar level of overseas exposure for Schroder Recovery (GB00B3VVG600). Majedie UK Focus (GB00B7S3QT06) had 9.7 per cent of its assets in international shares.
It might seem surprising to see some of these names delving into other markets, given that many are seen as value funds. With so many cyclical stocks available in the UK, investors may wonder why they need to look elsewhere for opportunities. But going beyond the UK may be a way of diversifying the portfolios, or differentiating them from the competition.
Not all funds list their international exposure in factsheets, but it can be worth scanning these and other documents for clues on where managers are hunting.
As noted, the UK is already a market with a global character. But it's worth asking if UK managers are buying your favourite overseas stocks, too – for better or worse.
