It is now almost one year since the UK government triggered Article 50 – the clause in the Lisbon Treaty that officially kick-started the UK’s departure from the European Union.
But since the Prime Minister pulled the trigger on 29 March 2017 to 1 February 2018, equity markets across the board – including Britain – continued climbing.
This will have come as a surprise to those who worried that Brexit-related uncertainty would cause choppy UK market returns and even a prolonged correction – myself included.
As always though, in terms of stock markets there have been winners and losers. Globally-speaking, emerging market and Asia Pacific equities achieved the strongest returns over the period*. This is likely the result of Chinese tech giants such as Alibaba, Baidu and Tencent significantly contributing to the broader region’s market returns.
In contrast, despite hitting record highs over the past year, the US’s S&P 500 and London’s FTSE 100 stock market indices have not quite kept pace with their emerging market peers. In the case of the UK stock market, in particular, a lot of these returns have been driven by companies that reside further down the market-cap spectrum (often with more exposure to the domestic UK economy). While the FTSE 100 returned 5.2%, the FTSE 250 and FTSE Small Cap indices are up 9.2% and 11.7% respectively*.
Due to the stellar gains made in the UK small- and midcap space, the IA UK Smaller Companies sector has been the second-best performer in the Investment Association, with an average total return in sterling terms of 19.5%*.
Within this sector, the best performer has been Jupiter UK Smaller Companies fund, which is up 39.5%*. This is followed by Old Mutual UK Smaller Companies Focus and TB Amati UK Smaller Companies, which have returned 30.1% and 27.4% respectively*. In contrast, MI Downing UK Micro-Cap Growth and Schroder UK Dynamic Smaller Companies are the only funds in the sector to have posted single-digit returns with respective gains of 3.6% and 9.4%*.
Meanwhile, the IA UK All Companies sector, which is home to UK equity growth funds that invest across the cap spectrum, is in 13th place for its average one-year total return of 8.2%*. Within this, the top performers have been small-cap biased Elite Webb Capital Smaller Companies Income & Growth and MI Chelverton UK Equity Growth, both of which have returns of more than 30%.
The IA UK Equity Income sector fared slightly worse than its growth counterpart with an average total return of 5.8%. Winners over the past year have been Man GLG UK Income (17.4%*) and MI Chelverton UK Equity Income (16.4%*), a member of Moneywise’s First 50 Funds, while LF Woodford Equity Income (also a First 50 Fund) and Rathbone Blue Chip Income and Growth have brought up the rear.
For UK investors who have held bonds rather than equities since Article 50 was triggered, the year has been less fruitful. The IA UK Gilts sector made a loss on average, down 1%*. Only one fund, iShares Over 15 Years Gilts Index, made it in to positive territory with a tiny gain of 0.08%*.
Elsewhere in the bond market, the popular IA Sterling Strategic Bond sector has returned 3.5%* on average. While Tideway GBP Hybrid capital and GAM Star Credit Opportunities returned more than 10%, four funds have lost small amounts, with Virgin Income down 2.6%*.
It is surprising that UK-facing smaller companies have been the key drivers behind the UK equity market’s strong performance. Nobody knows what impact Brexit will have but, with only until March 2019 to strike a deal with the EU, investors must tread carefully and be well-diversified.
Darius McDermott is managing director at Chelsea Financial Services and FundCalibre
* Total returns in sterling from 29 March 2017 to 1 February 2018. Source: FE Analytics.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott’s views are his own and do not constitute financial advice.