The ongoing consumer squeeze combined with a GDP slowdown means UK investors should focus on more than the ongoing Brexit negotiations, according to WH Ireland's John Goodall, who warned these could have significant ramifications on the home economy.
As such, the research analyst told FE Trustnet the firm is underweight UK equities across its portfolios, despite being overweight equities as an asset class generally.
"In the UK, we have real concerns about the consumer and the slowdown in GDP – it’s not just Brexit," he explained. "It just doesn’t seem very sustainable in terms of how we’re relying on unsecured debt. The savings ratio has hit a new low; these figures have never been seen before.
"So, even with all the help we have been given [through ultra-loose monetary policy], the GDP is still very low and it will get worse when these things turn around. I think there is some reason for caution there."
The UK consumer squeeze has been well-documented over recent months, as wage growth has struggled to keep pace with inflation.
One concern many investors have is that, despite this headwind, consumers are purchasing the same amount of goods as before but are instead increasing borrowing more.
It’s a concern shared by fund managers also. Earlier this year, Pyrford's Tony Cousins told FE Trustnet that he is more defensively positioned than ever due to the rising leverage of UK households at a time when interest rates are far more likely to rise than fall.
"[In terms of mortgages] you can go out and borrow from someone like Barclays Bank or a building society at 1 per cent," he said. "The problem is though, if base rates went up by just 50 basis points, your interest rate payments would go up 50 per cent. It's just simple mathematics. As someone who lived through the late 1980s when interest rates reached double digits, you can see this happening again."
That said, WH Ireland’s Goodall doesn't believe the Bank of England’s Monetary Policy Committee will vote to hike rates in the UK any time soon and believes inflation has now peaked due to the fall in oil price.
Performance of index in 2017
While he admitted this could provide some relief for consumers, he warned that it doesn't solve the problem of mounting household debt and the ramifications this could have over the longer term.
"People are borrowing more – it doesn’t matter whether inflation is 1 per cent or 2 per cent – you’ve got a problem," the research analyst warned. "We can already see tentative signs of a slowdown in housing, for example, and we all know how important that is.
"Also, if you think about the low level of interest rates, that has encouraged so much borrowing. For example, more and more people are buying cars on PCP [personal contract purchase] deals and that’s very dangerous. You can’t rely on that to keep on going."
When it comes to portfolio construction though, the team at WH Ireland does have exposure to UK equities through a select couple of funds.
One such fund is the five crown-rated Trojan Income, which has been headed up by FE Alpha Manager Francis Brookes since its launch in 2004.
Brookes is renowned for his focus on capital preservation and his cautious approach to selecting income-paying stocks. Following the unsustainable dividend pay-outs many financial companies made during 2007 and 2008, the manager tends to remain underweight in this area of the market. He also tends to steer clear of resources and energy sectors.
Over the last decade, the £3.5bn fund has returned 134.96 per cent compared to its average peer and benchmark's respective returns of 78.95 per cent and 81.16 per cent. It has done so with a top-decile maximum drawdown (which measures the most money lost if bought and sold at the worst possible times), downside risk (which predicts a fund's susceptibility to lose money during falling markets) and Sharpe ratio (which measures risk-adjusted returns).
Performance of fund vs sector and benchmark over 10yrs
Had an investor placed an initial £10,000 into the fund a decade ago, they would have received £4,604.08 in income alone.
More recently, the team has added a position in Richard Colwell's four crown-rated Threadneedle UK Equity Income fund. Colwell aims to find undervalued and unloved companies and adopts a total return mandate; he is therefore willing to hold some stocks which pay out little or no dividends if he believes they could do so in the future.
Colwell's bottom-up approach to stock selection tends to lead to a concentrated portfolio of around 45 stocks.
Sine the manager took to the helm of the £4.1bn fund in 2010, it has returned 134.49 per cent compared to its sector average and benchmark's respective returns of 101.36 and 89.6 per cent.
An initial £10,000 investment into the fund at the start of Colwell's tenure would have resulted in a £4,610.65 pay-out in income alone.