Last month I wrote about beginning to go global as I increased my non-UK exposure in response to the unstable political and economic situation. The impending general election could have resulted in a change of government to one much less supportive of business and of investors. In early November therefore I reduced my UK exposure from 58% to 52% as a precaution and I had plans ready to reduce this further depending on the outcome. In early December I sold a little more of my UK holdings in order to hold more cash.
As we now know such fears of a Labour government or hung parliament have proved to be unfounded and the Conservative government has won a landslide victory. In my view such a decisive outcome means that both the Brexit stalemate and the Labour threat are removed. Some Brexit uncertainty remains as to the shape of a future trade deal, but overall the UK is now a better place to be invested. Having reduced my UK exposure, I am now cautiously increasing it.
One week after the polls closed the FTSE All Share total return index is up by 4.2%. My portfolio has risen by 3.6%. This is acceptable to me given that I have some exposure to bonds and property and to international equities and that my UK exposure had been reduced to 52%.
Even after this “Boris bounce” following the general election UK equities are still relatively cheap compared to global and US equities. As at 19 December 2019, I calculate that buying £1 of income is 31% cheaper in the UK than it is globally, and 34% cheaper in the UK than in the US. The same calculation also shows the UK to be only 5% cheaper than Europe and only 9% more expansive than the Asia Pacific region. This is based on the dividend yield of selected income investment trusts. These show an average yield of 4.80% for Asia Pacific trusts (HFEL, AAS, SOI), 4.40% for UK trusts (EDIN, CTY), 4.20% for a European trust (JETI), 3.03% for global trusts (HINT, STS, SCAM), and 2.90% for a US trust (NAIT). I am still persuaded that UK equities offer good value but now I do want a few more of my eggs in that basket.
The latest information on these investment trusts can be found at the AIC website under find and compare investment companies. You can then filter on a particular AIC sector or else search a trust name or TIDM code (e.g. CTY).
After my changes last month my portfolio looked like this:
|Investment Trust Sector||Portfolio %||UK %||Non-UK %||NDY %|
|UK Equity Income||38.78||33.09||5.69||3.67|
|Asia Pacific Income||21.90||0.32||21.58||4.98|
|Global Equity Income||21.09||1.68||19.41||4.11|
|Property - UK Commercial||9.02||9.02||0.00||7.67|
|Debt - Loans & Bonds||8.42||7.39||1.03||7.65|
Note: Data is from my portfolio and from the AIC website as at 7 November 2019.
I now intend to leave my bond and property holdings unchanged but to reduce my global and Asia Pacific exposure and increase my UK exposure. Having added certain trusts in the global and Asia Pacific sectors just last month I intend to keep all of my holdings in these sectors but to trim the size of some of them. My non-ISA holdings are all in UK trusts and will not be changing. My ISA holdings are spread across three platforms and my increase in UK exposure will ensure that each platform has some UK exposure as well as some global and/or Asia Pacific exposure. I have initiated some trades this week and am now awaiting confirmation of them, but they should result in an increase in UK exposure of about 5%. This will bring my UK exposure roughly back to where it was two months ago. Arguably I should have not made any changes before the election, and I would not then need to make any changes now. That, however, is hindsight and I don’t regret my approach to this. This situation actually served as a good prompt to review my portfolio and consider how I would go global with my portfolio if that were needed.
All these portfolio changes and the raising of cash levels will likely curb the income growth from the portfolio in the last two months of this year. Income growth has been more of an objective for me than capital growth over the last six years. In the new year I expect to make further progress on that income growth once these portfolio changes are behind me. I expect UK, Asia Pacific and selected global equities to continue to provide good income and good income growth, so I will continue to invest in them. I may add further to my UK position as further events unfold. Although subject to some Brexit uncertainty continuing as trade talks proceed, I think UK equities will continue to make progress.