Fund Briefing: UK Equities

25 July 2017

These are unsettling times for the investors in UK equities, the word for shares in companies listed on the London Stock Exchange. A string of terrorist attacks in major UK cities, high-profile marches against austerity, and devastating tragedies such as the Grenfell Tower fire have contributed to a widespread feeling of unease.

Voters are also divided on political issues. Last year’s decision to leave the European Union was extraordinarily close, while the general election saw the Conservatives win with a reduced majority, forcing them to pursue a power-sharing deal with the Democratic Unionist Party.

The general concerns were illustrated in a YouGov poll for The Share Centre, which found more than six in 10 people believe the outcome of the general election will negatively impact markets.

Richard Stone, chief executive of The Share Centre, isn’t surprised. “Investors do not like uncertainty and the prospect of political wrangling, an unstable government and increased doubts over the nature of the Brexit deal we may be able to negotiate have all surfaced due to the general election,” he says.

However, the past 12 months have been surprisingly good for investors, with the FTSE 100 index, which tracks performance of the 100 biggest companies traded on the London Stock Exchange, up almost 12% to 7,377 points in early July, despite the constant diet of terrible news. The FTSE 250 index of medium-sized companies, which tracks performance of the 101st to the 350th largest companies listed on the London Stock Exchange, is 14% higher over the same period, at 18,833 points.

In addition, in the year to 30 June 2017, the average fund in the Investment Association (IA) UK All Companies sector has gone up 22%, while there has been a 36% uptick for the average IA UK Smaller Companies fund, according to Morningstar data.

The first half of the year has certainly seen some very strong performances from UK equity funds, with Old Mutual UK Smaller Companies Focus coming out on top.

Adrian Lowcock, investment director at Architas, says: “Its performance is a reminder that stock picking and active management can really add value. Manager Nick Williamson runs a diverse portfolio and is ably supported by a strong UK team at Old Mutual.”

Patrick Connolly, a certified financial planner with Chase de Vere, agrees that the UK stock market has continued to be resilient and perform well, despite the economic and political uncertainty that investors have witnessed in recent months.

“There is not a direct and immediate relationship between stock market performance and economic growth or political events,” he says. “Performance is more linked to general investor sentiment and to the performance and outlook for individual companies.”

He points out that investor sentiment has been particularly positive towards large companies in the FTSE 100 index due to Sterling’s weakness since the EU referendum vote. This is because it makes the overseas earnings of large companies worth more when converted into Sterling.

David Coombs, head of multiasset investments at Rathbone Unit Trust Management, believes investors need to acknowledge we have a two-tier UK stock market.

He points out that on one side you have large cap, international companies whose prospects are less dependent on the UK, and on the other there are more domestically-focused names.

“I own overseas earners such as Rentokil and Carnival and don’t need to take risks on companies focusing on UK customers,” he says. “I’m concerned about the housing market, inflation, and the UK consumer.”

It’s a view echoed by James de Bunsen, a multi-asset manager with Janus Henderson Investors. “The UK has been remarkably resilient, mainly held up by the consumer, but you’re seeing a real weakening in consumer sentiment and retail spending,” he says.

How to choose a UK equity fund For those wanting UK equity exposure there are plenty of funds from which to choose. In fact, there are more than 260 funds in the IA UK All Companies sector and around 50 available within IA UK Smaller Companies.

Given the fact people like putting money into their ‘home’ market, it’s no surprise that UK All Companies has £166.4 billion of assets under management – £78.1 billion more than IA Global, the second most popular sector. IA UK Smaller Companies, meanwhile, is home to £14.4 billion.

Juliet Schooling Latter, research director at Chelsea Financial Services, believes future returns from UK equities will be conservative.

She points out that the FTSE 100 and FTSE 250 indices are near all-time highs and expects Brexit negotiation-inspired wobbles.

“Companies are looking on the expensive side and earnings growth is not strong enough to give me much comfort,” she says. “If Sterling strengthens, companies that have benefited from its fall will also see their fortunes reversed to some extent.”

She suggests a multi-cap fund could be a good place to start for UK equity investors because these funds tend to be more defensive in nature. While smaller companies funds have done well, she points out that they can be risky and more volatile.

“I prefer a good stock-picking actively managed fund to a tracker, but this is a market where investors shouldn’t tolerate bad performance for too long,” she says. “They also need to make sure a fund doesn’t get too big that its investment process is compromised.”

Fund to watch: Old Mutual UK Mid Cap fund

This fund, a member of the Moneywise First 50 Funds for beginners, aims to provide capital growth from investing primarily in a portfolio of medium-sized UK companies.

Mark Dampier, research director at Hargreaves Lansdown, says the fund has generated significant long-term outperformance of its benchmark.

“Our analysis suggests the manager’s performance has been driven by astute stock picking,” he says. “With the support of a talented team of fund managers investing in the UK, we feel he has the ability to deliver good long-term returns.”

The 10 largest holdings in the portfolio include, the fast-growing international fashion e-tailer, that represents a 7.7% share of the fund’s assets under management.

Paysafe Group, the online payments company, is the next biggest investment for the fund at 6.5% of the portfolio, followed by 4.9% in Ascential, the business-to-business media fi rm.

The fund also holds investments in retailer JD Sports Fashion, property developer Taylor Wimpey, packaging company RPC, and Shawbrook Group, the savings and lending bank.

The fund’s largest sector weightings, meanwhile, are in industrials (26%), financials (25%) and consumer services (24%). Other sectors with significant weightings include consumer goods (10%), technology (4%) and telecommunications (2%).

Old Mutual UK Mid Cap

QUICK GUIDE: Is this area right for me?

Consider investing in UK equity funds if…

  • You want access to UK-listed companies
  • You believe the FTSE 100 will rise
  • You feel comfortable investing in names you recognise

How much should I invest in this sector?

Low-risk investors: 20%

Medium-risk investors: 25%

High-risk investors: 25%

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