The truth about UK All Companies Sector

Published by Rob Griffin on 19 October 2010.
Last updated on 19 October 2010

UK All Companies is by far the most popular sector with investors. There is more than £87 billion in this area, which equates to 17.8% of total assets invested in UK funds, according to figures from the Investment Management Association (IMA).

This may be an impressive statistic, but what's the attraction? Why are so many people drawn to a sector that has delivered pretty mediocre returns over the past decade and trailed sectors such as Global Emerging Markets and Asia Pacific ex-Japan?

The answer is familiarity, according to Andrew Merricks, head of investments at Skerritt Consultants.

People feel comfortable putting their money into stocks they know, and many stocks in this area are household names such as Vodafone.

Multinational sector

However, there are a few points to bear in mind. First is the fact that buying a fund in this sector does not necessarily mean you're getting exposure to the home economy. In fact, this is one of the most common misconceptions.

Although the sector is described as 'UK', many overseas companies have chosen to be listed in London even though their main operations may be abroad.

In addition, many UK companies are multinational in nature and derive much of their income from overseas - just look at the likes of BP and Vodafone.

This particularly affects funds that buy stocks listed on the blue-chip FTSE 100 index. Many of these earn a large slice of their revenues abroad and are not really affected by economic issues in the UK, explains Darius McDermott, managing director of Chelsea Financial Services.

"Buying into this index will effectively give an investor 40% exposure to the UK and 60% to the rest of the world, so it's certainly not the way to go if you want access to the UK itself," he says.

Even smaller companies can be dependent on overseas markets.
Bearing this in mind, the UK All Companies is a very difficult sector on which to get a handle.

And it doesn't stop there. While all of its funds must invest at least 80% of their assets in UK equities whose primary objective is achieving capital growth, the reality is that their investment philosophies and management styles can vary enormously.

The aforementioned size of the sector is also an issue, making it difficult to sift the wheat from the chaff.

At the last count, there were 303 funds - more than double the number in most other IMA sectors. The next largest is Global Growth, which contains a comparatively modest 191.

There are funds investing in the largest blue-chip names; those concentrating on medium-sized stocks; portfolios seeking pure growth; others also focused on income generation; those with ethical objectives; and some that simply track the stockmarket.

When you consider that the highest yielding fund pays an income of 5%, while many pay nothing, it's little wonder investors get confused when looking at this area.

This is illustrated by the huge difference between the best and worst performers over the past decade.

The top-performing fund, SVM UK Opportunities, has returned a decent 160%, but those at the bottom of the table have shed almost a third of their value.

Even during the past 12 months there has been a sharp contrast: while the standout performer has been the MFM Slater Growth fund, with its 67.36% return, the worst has been Templeton UK Equity, with a lacklustre 2.9%.

So where does that leave investors?

If you want to tap into the UK stockmarket - and this makes sense in terms of diversification - you must consider how you would prefer to access this exposure. Do you believe the blue-chip FTSE 100 giants are undervalued?

Will the mid-cap names deliver the best returns over the coming years? What industrial sectors are likely to thrive and which funds have the largest weightings in them?

So, you could consider an investment in the UK All Companies sector if you want a diversified portfolio of holdings, or believe the UK stockmarket is set for brighter times over the next few years.

Consider investing in this sector if...

• You are looking for exposure to UK-listed companies;
• You believe the UK stockmarket has a positive outlook;
• You are keen to diversify your portfolio.

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