Balanced investors should be considering allocating more to global equities, especially emerging markets such as China, while trimming back their exposure to the UK in the run up to Brexit, according to a panel of leading financial advisers. 
The recent rebalance of the FE Adviser Fund Index (AFI) Balanced portfolio witnessed an increase in the recommended exposure to IA Global, IA Global Emerging Markets and IA China/Greater China funds.
However, IA UK All Companies and IA UK Smaller Companies were among the peer groups that the 19 financial advice firms involved with the FE AFI were suggesting investors should be moving away from.
The FE AFI is made up of the recommended portfolios of a panel of leading UK financial advisers, based entirely upon the funds they recommend to their clients. There are three portfolios in the range: FE AFI Aggressive, FE AFI Balanced and FE AFI Cautious.
The FE AFI Balanced portfolio, which this article will focus on, is made up of funds deemed suitable for a person in the mid-40s who is seeking to retire at 65. All the funds currently in the FE AFI Balanced portfolio can be found here.
Changes in FE AFI Balanced allocations
Source: FE
In the latest rebalance of the portfolio, which took place at the start of February, the biggest change was a reduction in the recommended allocation to the IA UK All Companies sector.
Previously, there was a 15.51 per cent weighting to the peer group in the portfolio but this has declined to 12.76 per cent. It’s important to note that the sector remains the largest allocation in the FE AFI Balanced portfolio.
Four IA UK All Companies funds have been removed entirely from the portfolio in rebalance: GVQ UK Focus, Fidelity Special Situations, Neptune UK Mid Cap and Slater Growth.
However, five have been added. They are Baillie Gifford UK Equity Alpha, GVQ Opportunities, Jupiter UK Growth, Man GLG Undervalued Assets and Schroder Recovery.
FE AFI panellist Chris Wise, director at Whinchat Financial Planning, said: “Both my short- and near-term outlooks for the UK equity market are still positive. The issues surrounding Brexit, world trade etc, will offer opportunities, together with issues that we have witnessed over the past few months.”
Within his own balanced portfolios, Wise has a direct allocation to UK equity funds of around 15 per cent – although overall exposure is higher through the underlying holdings of long/short, multi-asset and global funds.
“My direct exposure is spread between special situations and equity income funds and I have retained exposure to UK small-cap, as our investment process is designed for the medium-to-long term.”
During the FE AFI Balanced portfolio’s rebalance, the allocation to IA UK Smaller Companies funds was lowered from 6 per cent to 3.62 per cent. However, the panel added slightly more to IA UK Equity Income funds, taking the exposure from 4.07 per cent to 4.47 per cent.
New FE AFI Balanced sector weightings
Source: FE
Sitting alongside the recommendation to scale back UK equity exposure is an increase in global equities. This trend has been observed place in the wider market since the UK voted to depart the EU later this year.
The suggested allocation to the IA Global sector has been lifted from 7.51 per cent to 8.97 per cent.
Five funds from the peer group were introduced in the rebalance: Baillie Gifford Global Discovery, Brown Advisory Global Leaders, Lazard Global Listed Infrastructure Equity, Stewart Investors Worldwide Sustainability and Veritas Global Focus. MI Thornbridge Global Opportunities and Invesco Global Smaller Companies (UK) were the only removals.
The biggest IA Global weighting – and the largest in the whole FE AFI Balanced portfolio – is to Fundsmith Equity. It has a 2.32 per cent allocation (although this represents a trimming from its previous 2.73 per cent).
Austen Robilliard, head of investments at Murdoch Asset Management, pointed out that Fundsmith Equity’s focus on quality companies has delivered “substantial outperformance” in both rising and falling markets.
The £16.6bn fund, which is headed up by FE Alpha Manager Terry Smith and holds the top rating of five FE Crowns, sits in the top decile of the IA Global sector over one, three and five years.
“Many investors like to think of themselves as having the best investment process, able to take maximum profits from one idea and recycle them into an even better opportunity, but Terry thinks differently,” Robilliard said.
“His premise is to find good companies, not overpay for them and, most importantly, do nothing. If you have a great quality asset backed by supporting financials, earnings growth and strong cashflows, why would you choose to sell it at a small short-term profit when you can retain it and eke out rewards year after year?”
Performance of fund vs sector and index since launch
Source: FE Analytics
As well as global equities, the AFI panel said balanced investors should consider a higher exposure to IA Global Emerging Markets and IA China/Greater China funds.
Both sectors were among the worst performers of the Investment Association universe in 2018 as investors fretted about the impact of the US-China trade dispute, tighter monetary policy and slowing growth.
The average Chinese equity fund was down 14.18 per cent (the second worst performer of all sector) while global emerging markets strategies lost 11.78 per cent on average.
However, the FE AFI Balanced’s allocation to IA Global Emerging Markets has been lifted from 1.40 per cent to 2.82 per cent. JPM Emerging Markets, Artemis Global Emerging Markets and Vanguard Global Emerging Markets are some of the funds being tipped.
Meanwhile, the weighting to IA China/Greater China went from zero to 1.18 per cent, with exposure being suggested through Invesco Hong Kong & China (UK).