Appearance of value leads group to increase weighting at expense of us equities in £2.4bn fund
The appearance of value in UK equities has led Legal & General to up the weighting to the asset class in its Linked Pensions Managed fund at the expense of US equities.
The £2.4bn fund breaks down to around 53% in UK equities, which remains the single biggest holding, 22% in overseas equities, 15%-16% in fixed interest, 3.5% in property and 6% in cash.
A geographic breakdown of the equity component reveals the fund is overweight UK equities, underweight the US and neutral Asian equities relative to its peer group.
John Monckton, director (bonds) at Legal & General, said both the UK and US governments have increased public spending. This, he added, is 'a return to Keynesian economics after a long period in the wilderness,' a trend that is gaining momentum.
Monckton points to the UK where, of the 22 Government departments, 18 are increasing their spending in relative terms above the real trend growth rate of GDP.
'This inclines us towards investment in these markets because there is growth and economic flexibility,' he said. 'It provides a favourable background for stock market investment.'
Monckton said equity weakness in the UK this year has come partly from fears of economic weakness and partly from fears of profit weakness. However, the US market is struggling with problems the UK does not have.
The US, he said, faces the same economic and profit concerns but has also developed a fear of further corporate scandals in the wake of the Enron and WorldCom accounting affairs. This has lead Legal & General to divert capital from US to UK equities over the course of the year to capture some of the increased value in the UK market.
Areas that are attractive within the UK include food and general retailers, as well as healthcare stocks. Cyclicals are less attractive and are underweight in the portfolio.
'We are looking at non-cyclical growth. We don't expect a capex boom in manufacturing but rather in areas such as schools and hospitals,' he said.
On a brighter note, the US has seen falling labour costs relative to GDP, not just as a result of falling wages but also because of increased efficiency, Monckton noted. 'Profits in the US will continue to rise over the next 12-24 months, partly as result of falling labour costs,' he said. 'However, even with a rise in profits, the valuation base is unattractive when compared to the UK.'
The fixed-interest portion of the fund is concentrated in gilts, with the remainder composed mainly of dollar, euro and yen-denominated bonds. Government bonds are relatively expensive at present, he said.
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