Why some of the biggest UK fund managers look outside the FTSE

It'd be a fair assumption that portfolios invested in UK equity sectors and benchmarked to the FTSE would only be buying UK-listed companies. But in fact, many of the biggest players invest outside UK as well.

From the UK Equity Income and UK All Companies sectors, 21 portfolios had the ability to invest in non-UK assets, according to data from Morningstar.

The largest of these was Janus Henderson’s The City of London trust at almost £3 billion in assets under management , which can invest up to 20% of the portfolio overseas.

A scan of City’s top ten holding shows all of them are major UK names like HSBC, Shell, BAE Systems, British American Tobacco and NatWest Group to name a few but according to its latest factsheet, 91% of the portfolio is invested in the UK, with the remainder spread across the US, Germany, Switzerland, France and Hong Kong.

Read more about the make up of other major indices 

In monetary terms, this means over £2.5 billion was invested in the UK at the end of last year, with just £197.4 million invested overseas.

Managers Job Curtis and David Smith explained that they retain this non-UK allocation as a way to “add value” from “particular opportunities which you can't find in the UK market”.

This was a common argument among several managers that AJ Bell spoke to, that while they were long-term bullish on the UK, sometimes for certain thematic and sector exposures they needed to go more international.

Opportunities you just can’t get in the UK

Microsoft was a key example of this for Curtis, which the trust bought back in 2011 and sold out three years ago “when its entire market cap was worth more than the FTSE 100 combined”.

Fidelity Special Values also holds a 20% buffer for non-UK stocks of which managers Alex Wright and Jonathan Winton currently have around 12% deployed.

The trust’s top position is in French energy firm TotalEnergies, which Winton explained they backed over UK rivals Shell and BP because it had done a better job at reinvesting in itself over the years “where some of the sort of UK majors have been through periods where they've been sort of a bit more distracted”.

“If we find a more attractive option that's not necessarily listed in the UK then we're happy, we're happy to buy it,” he said.

Read about investing in the British companies you use daily

While the arguments may appear fair and/or reasonable, Wright humoured what he would say if challenged at an annual general meeting by a shareholder about how much they could really claim to back the UK market if they weren’t 100% committed to it in the trust?

“I’d say at almost 80% invested in UK companies we are very much a UK fund and we are overweight the UK in terms of where revenue is generated.”

Indeed, around 75% of the revenue generated by FTSE 100 companies comes from outside the UK, such is the multinational nature of the index, something all of the managers pointed out.

Better diversification

Sometimes it was more to do with accessing sectors which don’t have a huge presence in the UK, such a pure mining stocks, for which Fidelity looks to Australia or Canada.

Temple Bar’s manager Nick Purves argued that the diversification point applies to sectors the UK is arguably a leader in such as banks, as the portfolio uses some of its 30% ex-UK limit to hold two Korean banks alongside three UK-heavyweights: NatWest, Barclays and Standard Chartered.

“You don’t want 20% of your portfolio in just three names,” Purves explained. “So, holding other names is a safer option.”

Investing in smaller companies is not always practical  

Some may argue that rather than looking beyond the UK for opportunities, fund managers should just invest across the market capitalisation spectrum, ranging from the FTSE 100 to smaller companies.

While many of these 21 funds can and do invest in the FTSE 250 and 350, for portfolios in the billions this isn’t a practical solution as Temple Bar’s Purves explained, because in order for them to build a company to a size where it could actually impact performance they’d have to own so much of it that it’s not practical for them.

The average AIM listed stock has a market value of around £104 million to £111 million, according to data from London Stock Exchange Group and research by AJ Bell found that back in 2024 just six AIM listed companies were worth more than a £1 billion, down from a 2021 peak of 30 companies.

Read more about UK companies valuations

With assets of £1.2 billion Temple Bar celebrated its centenary this year and has 71% of the fund in the UK currently, just bumping on its 30% limit.

This could be increased if the UK market continues shrinking, according to the trust chair Charles Cade.

In 2016 there were around 2,300 companies listed on UK markets and today there are fewer than 1,700. Since the beginning of 2020 the number of companies on the AIM market has fallen by over 30%, from 863 to 553 mainly due to vast amounts of takeover activity, with international and private firms capitalising on the UK’s seemingly perpetual valuation discount to other major markets.

While that is a decision the board would take, Purves made it clear that they would not look to make the trust open to the private market as a way to keep it pure UK.  

“Every UK trust board trust should be having this conversation,” he said.

The high levels of mergers and acquisitions that UK companies have endured in recent years is part of the reason why it’s useful to have a non-FTSE remit according to Finsbury Growth & Income’s deputy manager Madeline Wright, because it can allow managers to potentially keep exposure to these businesses.

Holding onto your favourites if they’re taken over

Several of Finsbury’s top holdings have been subject to takeovers in recent years, some going private like Hargreaves Lansdown and Schroders which meant they lost access to these stocks, but when Cadbury was bought by US listed firm Mondelez International in 2010, it was a different story

“That was a legacy holding and in this particular case study, just to make sure I understand, it's like almost this 20% limit is a demonstration that when something like this does happen, you have the ability to stay invested in a company that you really liked,” Wright explained.

Finsbury’s board extended managers Wright and Nick Train’s ability to increase the maximum percentage allowable in overseas equities from 20% to 30% in 2018, having started out at 10% in 2007. Both managers have long exalted the opportunities in the UK and only have less than 1% overseas currently.