A growing number of multi-asset fund and wealth managers are reducing holdings of UK equities amid concerns about the outcome of May’s general election.

The FTSE 100 broke through to an all-time high this week, but some investors believe that uncertainty over the election result — together with worries over potential knock-on effects such as a referendum on UK membership of the European Union — could point to torrid times for sterling and UK stocks.

David Coombs, head of multi-asset investments at Rathbones, reduced his allocation of UK stocks against global indices across his portfolios late last year.

Within his UK equity holdings, he has increased the proportion of passive funds, since these are weighted towards large-caps with greater overseas exposure.

“The election is one of the biggest factors I’ve been thinking about this year,” he said.

Investing on a two- to three-year view, Mr Coombs believes the UK faces a number of poll-related risks that could make its markets “vulnerable to international outflows”.

Possible outcomes include a second election within months of the May vote, in which no party is predicted to win a majority; a Conservative-led government followed by two years of “EU referendum paranoia”, since the party has pledged a vote on the UK’s continued membership of the union; or a Labour-led government perceived as anti-business.

The potential for the Scottish National Party to hold a king-making role raises more concerns, since the SNP backs the break-up of the United Kingdom.

“You need to be careful against home bias, in terms of currency and of asset exposure,” said Mark Haefele, global chief investment officer at UBS Wealth Management.

Bill O’Neill, head of UBS’s London investment office, added: “Just as they did with Scotland, the markets are saying ‘Fine, fine, fine,’ but then as the date approaches they will start to panic a little bit.”

He predicts “significant volatility” in the second quarter of 2015, adding that the implementation of the second stage of the UK’s austerity programme is another area of uncertainty.

Shaun Port, chief investment officer at the online wealth manager Nutmeg, reduced UK exposure across his portfolios ahead of last year’s referendum on Scottish independence. He cut exposure again at the start of this year, and is considering whether to exit all UK equity holdings.

US investors sold $48bn of UK stocks in August and September 2014, of which only $12bn has returned, said Mr Port. “We think there is scope for a more significant outflow from UK equities,” he adds.

Meanwhile, Neptune Investment Management has stripped UK exposure from its funds.

However, investors’ view is not unanimous, with some fund managers — especially those operating on long time horizons — arguing that the election should not prompt strategy changes.

David Jane, co-manager of the Miton Multi-Asset fund, believes sterling could be the “main shock absorber”, with the majority of any weakness likely to be against the dollar. But he has not adjusted his portfolio in the light of the election, believing that political developments elsewhere in the world, such as in Greece, are likely to have much more impact on markets.

Nick Train, who manages the Lindsell Train Global Equity fund, believes that “the outcome of the election is unlikely to have much impact on the long-term value of UK equities, for good or ill”.

He believes that current market conditions take into account the upcoming vote. “Certainly, there can be no one who doesn’t know that there is an election with an uncertain outcome due.”

John Chatfeild-Roberts, chief investment officer at Jupiter Asset Management, said: “I do not think that well diversified, internationally invested portfolios should be adjusted ahead of the election.”

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