Where should you invest in the UK?
It wasn't just the weather that warmed up Blighty this summer, the UK stockmarket enjoyed its own heatwave too, with investors ploughing millions into shares off the back of a more upbeat outlook.
Cheered by a rebound in recession-hit UK, we've been hitting the shops with our cash again, as house prices and other economic pointers have started to improve.
Figures from fund management trade body, the Investment Management Association, show funds that invest in the UK stockmarket were the bestsellers in June 2013, where retail investors notched up sales of almost £480 million, the highest since October 2006. Sales fell to £398 million in July but were still well ahead of sales in the US, which amounted to £247 million.
Following a prolonged period of disappointing economic figures, the UK appears to be once again entering a stage of growth. Official numbers show the UK economy grew by 0.6% in the three months to the end of June, double the 0.3% achieved during the first three months of the year.
Stronger manufacturing, exports and job figures have meant many experts now think the outlook for the UK is better than they previously thought. For example, the OECD has bumped its UK growth forecast this year to 1.5% from 0.8% and the National Institute of Economic & Social Research predicts the UK's economy will expand by 1.2% this year and by 1.8% in 2014, up from its earlier predictions of 0.9% and 1.5% respectively.
The higher forecasts are partly buoyed by a surge in optimism. According to research from consultancy GfK, consumer confidence in the UK is rising and in July hit its highest level in more than three years. And homeowners are once again feeling the comfort of property price rises. According to Halifax, in the three months to August, house prices were up 5.4% from a year earlier, the sharpest annual rise since the 6.3% clocked in June 2010.
As a result, it seems more of us are returning to the high streets and shopping malls to spend our cash, injecting millions into the economy. In fact, the latest numbers from the British Retail Consortium, the trade association for retailers, show that UK shops enjoyed their best July in seven years.
Sales fell slightly in August but remained well ahead of the 12-month average. Of course, while there are a variety of green shoots of hope arriving, investors must bear in mind that, despite the positive indicators, the UK still faces a long grind in getting back to a state of real and sustained economic growth, as it is still way off pre-crisis levels, when it would expand by around 3% a year. But, historically, stockmarkets tend to perform better when there is an anticipation of a better economic environment.
Patrick Connolly, a certified financial planner at Chase de Vere, says: "If the UK economy is on the road to recovery this will be positive for the stockmarket, although it is wise to recognise that what is happening elsewhere in the world is also hugely important."
Of course, there are two interlinking factors at play that will increase the appeal of stockmarket investing, namely low interest rates and rising inflation. With rates stuck at an all-time low of 0.5% and going nowhere, according to the Bank of England, until employment further improves, savers are struggling to find a savings account that will beat the rate of inflation – which eased slightly to 2.8% in July, from 2.9% in June.
But while there are potentially attractive gains to be made by dipping into the stockmarket, investors should remember that with the opportunity of better returns comes a greater risk of losing money. Here is a look at how best to invest for a UK recovery via diversified funds with strong track records.
UK growth funds
Rather than buying individual stocks, investors should look to lower and diversify their investment risk by opting to invest via a fund, sometimes referred to as a unit trust. When you invest in a fund, your cash is combined with that of other investors and used to purchase a spread of different shares by a fund manager.
An active fund manager who invests in UK stocks, for example, will buy stocks they think will rise in value and avoid those they feel will fall.
There are myriad of funds to choose from but Neil Shillito, managing director at independent financial planning firm SG Wealth Management, believes the AXA Framlington UK Select Opportunities fund, which among others has investments in fashion retailer Next and broadcaster ITV, is a solid starting point.
Shillito says: "Its fund manager, Nigel Thomas, is of an outstanding pedigree and has been competently managing clients' money for many years." And over the past five years, it has delivered a return of 78% to its clients.
The £7 billion M&G Recovery portfolio, one of the largest and, at 44 years old, longest-standing funds in the UK, has posted growth of 51% over the same period. Key investments in the fund include oil giant BP and easyJet. Shillito says: "This is a good fund if you want to sleep easy at night, knowing the manager has a genuine care and alignment with his underlying investors."
For his part, Connolly tips the Investec UK Special Situations fund, which has achieved a return of 88% over five years. Connolly says: "Its manager Alastair Mundy is a long-term investor who focuses on buying cheap, out-of- favour stocks, holding them until they recover."
Peter Chadborn, financial planner at Plan Money, rates the Old Mutual UK Mid Cap fund as "a consistent performer", which over five years has achieved a sizeable return of 106% for its investors. For those seeking a more 'passive' approach to investing in the UK, Connolly highlights the HSBC FTSE All Share Index.
This portfolio simply mirrors the performance of the UK's FTSE All- Share Index. As the fund does not have a fund manager, it is a cheaper investment, costing about 0.2% per year, while the annual charge on an active fund will be nearer to 2%. However, if the market falls, so will your investment as there is no manager to navigate the fund. Over five years, it has achieved 49%.
UK equity income
Equity income funds, which aim to deliver income alongside capital growth, are highly popular among UK investors. Like growth funds, they invest across a wide range of companies but focus on investing in those which pay dividends – in other words, corporations that share their profits with investors.
Typically dividend-paying companies tend to be large profitable firms. And dividends are big business; between April and June this year, UK firms paid out more than £25 billion in dividends to investors, the highest ever three-month total, according to research from Capita Registrars.
For investors seeking a UK Equity Income fund, Shillito recommends Standard Life Investments UK Equity Income Unconstrained. He says: "The fund has a very solid track record and a good team behind it and the yield is about 3.5%." Over five years, it has gone up by 63%.
Connolly likes Threadneedle UK Equity Income, which currently yields some 3.4%. Over the past five years, it has achieved growth of 73% and counts BT and insurer Legal & General among its main investments. He says: "This fund invests mainly in large UK companies and pays consistent dividends."
The Schroder Income fund is one of Chadborn's primary UK Equity Income picks. The fund manager aims to identify 'turnaround' companies, those with the potential to grow and better their business. The fund, which yields 3.71%, has achieved a considerable 86% gain over the past five years.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
The Organisation for Economic Cooperation and Development was established in 1961 to promote policies that will improve the economic and social wellbeing of people around the world. It uses a broad range of economic information and research to help governments foster prosperity and fight poverty through economic growth and financial stability and also ensure the environmental implications of economic and social development are taken into account. It can only make recommendations and has no powers of legislation; nor can it compel members to adopt any recommendation. Based in Paris, the OECD currently has 34 members, including the UK.