10 funds and trusts poised to surge on UK recovery
Analysts and financial advisers pinpoint funds they believe are well-positioned to benefit from the improving UK economic outlook.
Gordon Smith, fund researcher at stockbroker Killik & Co, says in order to gain "purer exposure" to the UK economy it is often best to move down the market capitalisation scale, outside of the larger globally focused FTSE companies.
Chelverton UK Equity Income
Smith favours exposure to UK small and medium-sized companies, recommending the £186 million Chelverton UK Equity Income fund managed by David Horner and David Taylor.
The fund aims to provide a progressive income stream and achieve long-term capital growth by investing primarily in a portfolio of main market and alternative investment market (AIM) equities. Over one year, the Chelverton fund has returned 45.2% compared with the average 25.1% for the UK Equity Income sector as at 25 October.
Legal & General UK Alpha
Smith also endorses the £173.4 million L&G UK Alpha fund managed by Richard Penny. It aims to provide the potential for long-term growth by investing in a concentrated portfolio of UK equities from larger companies, as well as small to medium-sized companies which may be selected from all economic sectors. Over one year, the L&G UK Alpha fund has returned 32% compared with the average 25.9% for the UK All Companies sector as at 25 October.
Majedie UK Equity
Ian Cooper, fund analyst at Brewin Dolphin, commends the £2 billion Majedie UK Equity fund, which is managed by Adam Parker and aims to produce a total return in excess of the FTSE All-Share index over the long term. Parker invests in a diversified portfolio of predominantly UK equities.
Over one year, the Majedie UK Equity fund has returned 34.1% compared with the 25.9% average for the UT UK All Companies sector as at 25 October. Cooper explains the fund was early to position for an improvement in G7 economies and therefore embraced cyclicality earlier than many peers.
He adds: "This included domestic cyclicals such as the UK banks, retailers, travel & leisure and a selection of overseas assets. The fund has been less positive on emerging market assets and consumer staples but, following the narrowing of the valuation gap in many of the cyclicals the managers have rotated the fund into more defensive areas."
River & Mercantile UK Equity Smaller Companies
Cooper also is a fan of River & Mercantile UK Equity Smaller Companies. He explains the fund invests in four different categories, one of which is recovery, along with quality, growth and asset-backed. Cooper says: "The recovery element, broadly, includes those companies where profitability is returning to a more normal level.
These opportunities are highlighted via a proprietary screen which was finding opportunities in UK consumer-exposed stocks, including UK housebuilders. These have performed very well over the past 18 months and opportunities are now increasingly being found in mid-cycle companies which should benefit from a pick-up in corporate spend."
Patrick Connolly, certified financial planner at Chase de Vere, suggests four funds ideal for taking advantage of the uplift in economic activity.
BlackRock UK Special Situations
First up Connolly highlights BlackRock UK Special Situations, managed by Richard Plackett. Connolly says: "This fund has significant holdings in small and mid-cap stocks. It was previously heavily focused on emerging markets growth but has now moved to put a greater emphasis on companies which will be benefit from growth in the UK such as housebuilders Bellway and Bovis."
It may also invest in other collective investment schemes. Over one year, the BlackRock UK Special Situations has returned 23.8% compared with the average of 25.9% for the UK All Companies sector as at 25 October.
Next is the £610 million Rathbone Income fund managed by Carl Stick, who aims to achieve above average and maintainable income but without neglecting capital security and growth. There is no restriction on the economic sectors or geographic areas in which the fund may invest.
However, investments will always be predominantly in the ordinary shares of UK companies. Over one year, the Rathbone Income fund has returned 23.6% compared with an average 25.1% for the UK Equity income sector as at 25 October. Connolly says: "This is an equity income fund which fishes further down the cap scale then many of its counterparts and so has a much greater reliance on UK companies doing business in the UK."
Old Mutual UK Select Mid Cap
Connolly also suggests £1.2 billion Old Mutual UK Select Mid Cap managed by Richard Watts, which as its name suggests aims to provide capital growth from investing primarily in a portfolio of medium-sized UK companies.
Over one year, the Old Mutual fund has returned 37.5% compared with the average 25.9% for the UK All Companies sector as at 25 October. Connolly says: "This is a top quality UK fund investing in mid-sized companies which predominantly do much of their business in the UK. The fund is well positioned to benefit from the improving UK economic outlook."
Cazenove UK Smaller Companies
Connolly's final choice is Cazenove UK Smaller Companies, managed by Paul Marriage, which invests at least 80% of its assets in the UK-listed companies that form the bottom 10% by market capitalisation. Over one year, the fund has returned 45.2% compared with an average 33.2% for the UK Smaller Companies sector as at 25 October. Connolly says: "This is one of the premier smaller companies funds which has an impressive long-term track record. By their very nature, many small companies are heavily reliant on the UK economy."
Jeremy Le Sueur managing director at 4 Shires Asset Management, highlights two investment trusts for investors to access top quality investment managers at a reasonable and, "dare I say it", low cost.
Lowland Investment Trust
Le Sueur recommends the Lowland Investment Trust, run by James Henderson, who aims for a higher-than-average return from growth of both capital and income over the medium to long term. It has a higher exposure to smaller companies and those listed on AIM than its peers in the UK growth & income sector. Le Sueur says the trust has an excellent track record, and is first amongst its peer group over three years. He adds: "James also has a lot of his own personal wealth invested in the fund. The net asset value has risen 87% over the three years to 30 September, whilst the benchmark has only risen 33% (source: Henderson). Ongoing charges - the total expense ratio (TER) - are 0.62% per annum."
Aberforth Smaller Companies
Le Sueur also favours the £960 million Aberforth Smaller Companies trust, managed by Alistair Whyte and David Ross. Le Sueur says: "This large trust has a good short-term track record as the discount has narrowed. It is an excellent way to hold a large swathe of UK smaller companies."
He adds: "The fund is run by the Aberforth partnership, who are specialists in the area and who know the companies they invest in extremely well. The TER of the trust is 0.81%."
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
This feature was written for our sister website Interactive Investor
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.