Investors over-exposed to UK equities, say IFAs

The overwhelming majority of financial advisers believe investors are over-exposed to UK equities, according to research conducted by Ignis Asset Management.

The research, conducted in late August, asked 180 advisers for their views on asset classes, regions, asset allocation, business levels and global markets.

Almost nine in 10 advisers (89%) said they thought investors were over-exposed to UK equities, with only 9% saying current allocation levels were appropriate. Within the figures, almost half of advisers (47%) said investors were ‘definitely' over-exposed to UK equities, with 42% conceding investors were ‘probably' over-exposed.

This consensus view may be seen as particularly alarming given that the majority of advisers do not believe the current rally is sustainable. Indeed, more than half (58%) of advisers said they did not believe we are in a bull market, with just 5% saying we are ‘definitely' in a lasting bull run.

Advisers' bearish views were reflected in their gloomy predictions for the UK stock market for the remainder of the year. More than nine in 10 (91%) believe the FTSE 100 will close the year below 5000, slightly under its current level. Fifty-six per cent believe the FTSE 100 will close 2009 between 4500-5000, with a further 26% predicting a close of between 4000-4500. (Five per cent said 3500-4000, 2% said 3000-3500 and 2% said below 3000.)

With UK equities set to disappoint in the short term and current asset allocation levels failing to close pension shortfalls, advisers were asked their opinion on how best to help solve the looming retirement crisis. A huge majority (83%) said greater exposure to emerging market equities is likely to play a key role in closing pension deficits, although 73% admitted they typically allocate less than 10% to the sector. (Twenty-eight per cent allocate between 0-5% and 45% allocate between 6-10%.) However, with almost a quarter of advisers (23%) saying they allocate 11-15% to emerging markets - with a further 3% allocating 16-20% - the sector may benefit from much greater inflows over the coming years.

Likely to lack such popularity, however, will be funds with a narrow asset or geographical focus. Stung by their poor performance, the majority of advisers say their faith in single country and single sector funds has been shaken by the financial crisis. Fifty-four per cent of advisers said they had been deterred from investing in single sector funds as a result of the crisis, while 52% said they had been discouraged from investing in single country funds.

Business and market outlook

From a business perspective, the research reveals that advisers are feeling reasonably confident about current conditions, with 55% reporting an increase in investment business over the last three months. (Only 10% suffered a fall.) Encouragingly, an overwhelming majority (86%) expect business to increase over the coming three months, with just 1% expecting a fall.

The research also demonstrates that the areas to which advisers may allocate a greater percentage in the future are likely to include Asia Pacific, emerging markets and the US, which are the three sectors IFAs expect to perform best over three and five years. Over 10 years opinion was more divided, with Europe (ex UK) being the second most-tipped sector after emerging markets. Asia Pacific was third.

Jonathan Polin, director, Ignis Asset Management, says: "Investors traditionally have a home bias when choosing funds but it is startling to discover that almost nine in 10 advisers believe UK investors are over-exposed to UK equities. It is clear that investors need to rethink their strategy and seriously consider whether their existing asset allocation is likely to deliver the performance they need in order to meet their retirement objectives.

"After such a tough period for us all it is encouraging to see that advisers are feeling fairly bullish about their business levels, if not about the UK stock market. Investors are clearly recognising the value of advice and seeking help when making decisions that could have a serious impact on their future. The fact that advisers expect business levels to rise over the coming months is further proof that investor sentiment is improving."