All eyes are on the UK market now that the uncertainty of Brexit has been quashed and the coronavirus vaccination programme is well under way.
The country has been one of the most unloved across the globe for investors, with consistent mass outflows of cash since the EU referendum in 2016.
Meanwhile, the dramatic numbers of coronavirus cases and deaths over the past 10 months hasn’t helped its case.
All eyes are on the UK market now that the uncertainty of Brexit has been quashed and the coronavirus vaccination programme is well under way
However, with the UK’s political landscape becoming a bit more stable, and more than two million people vaccinated and therefore the prospect of light at the end of this dark tunnel, is it time for investors to come back to the once prosperous region?
Scott McKenzie of Saracen Fund Managers said the UK equity market is still a global pariah and continues to trade on a huge valuation discount.
But he said: ‘We are also beginning to see evidence of a post-Covid-19 recovery in earnings expectations from UK companies. The combination of low valuation and improved earnings momentum may prove a potent one in the year ahead.’
The Investment Association’s latest fund flow statistics, which looked at November 2020 – when news of the Oxford-AstraZeneca vaccination success emerged – showed UK All Companies was the worst-selling sector with an outflow of £425million.
But interestingly, this loss isn’t as significant as the £782million outflow seen in October or the huge £1,047million lost in June.
Three fund selectors told This is Money which funds and trusts are best poised for a positive bounceback in the coming months and years.
Rachel Winter of Killik & Co recommends the £905million BlackRock World Mining Trust
Rachel Winter, associate investment director at Killik & Co, said: ‘Governments worldwide are looking for ways to boost economic growth in the wake of the pandemic.
‘So we expect many of them to borrow money to fund large infrastructure projects, particularly ones relating to electrification.
‘Greater levels of infrastructure investment will raise demand for commodities such as iron ore and copper, benefiting the mining sector.’
She therefore recommends the £905million BlackRock World Mining Trust (ongoing charge: 1.02 per cent), which has sizeable positions in UK-listed miners such as Rio Tinto.
Rachel also likes LondonMetric Property, a £2billion UK-focused real estate investment trust with a particular focus on logistics warehouses.
The trust has performed well in recent years as demand for e-commerce has grown, and this has been accelerated by lockdowns in the pandemic.
In the six months to September 2020, the trust collected over 98 per cent of its rent, far outperforming other REITs with high exposure to offices and the high street.
Rachel added: ‘Since March 2020, thousands of people across the UK have tried online shopping for the first time, and many of these are likely to be long-term converts.
What is an ongoing charge?
The ongoing charge is the investing industry’s standard measure of fund running costs.
The bigger it is, the costlier the fund is to run.
‘We expect demand for logistics warehouses to remain high even as the vaccines are rolled out and lockdown eases.’
Her final pick is the £5.6billion Liontrust Special Situations fund (0.82 per cent).
While not immune to the difficulties experienced by the UK market in 2020, the fund far outperformed its FTSE All Share benchmark thanks to its focus on consumer staples such as Reckitt Benckiser and its underweight positions in fossil fuel companies.
Rachel said the fund takes a multi-cap approach – meaning it will invest in companies of varied size – and stands to benefit from any improvement in the UK’s economic fortunes.
Meanwhile, Darius McDermott, managing director at FundCalibre, said the UK has been unloved since 2016 almost entirely because of the uncertainty over Brexit.
‘If you look back over the past three decades, the UK stock market moved pretty much in line with the global one, but that relationship uncoupled in 2016 and the UK has lagged significantly since,’ he said.
‘So to me, the next few years are not about value or growth, large cap or small cap – I think you could be invested in pretty much any type of UK equity fund and do well.’
FundCalibre’s Darius McDermott likes TM CRUX UK Special Situations for its value tilt
For those looking to back small caps, Darius suggests the £53million Unicorn UK Smaller Companies (0.87 per cent) fund run by Simon Moon.
He said: ‘This is a very high conviction UK smaller companies fund with around 40 holdings.
‘Its manager focuses on company fundamentals and aims to make long-term investments, while avoiding low quality, cash-burning businesses.
‘All companies must be profitable at the point of investment and the team looks for stocks with lasting competitive advantages, experienced management teams and strong balance sheets.’
For a more diverse proposition, looking at companies of all sizes, Darius likes TM CRUX UK Special Situations (0.83 per cent).
‘The fund has a value tilt so had a style headwind, but absolutely smashed it when value had its rally on the back of the vaccine announcements,’ he added.
‘Manager Richard Penny is, by his own confession, a tight-fisted Yorkshireman when it comes to his investments. He likes to find a bargain and has proven himself very able to do so.
‘Companies tend to fall into two categories: rising stars that are quality companies that are growing and have high returns on cash, but whose shares are undervalued in Richard’s view and fallen angels – the very cheapest shares in the market – and the big price fallers and recovery companies, where there is hidden value and discarded quality.’
Meanwhile, Darius’s investment trust picks are the £1.5billion City of London (0.36 per cent) trust for income and the £714million Fidelity Special Values (0.72 per cent) trust for a general UK equity play.
He said: ‘For some reason there are a lot of UK equity trusts that have names that tell an investor very little abut what they do. City of London is one. But it has a very patient and cautious investor in manager Job Curtis, who will have been running it for 30 years this year.
If you are looking for income security, the City of London investment trust is for you.’
Darius McDermott, FundCalibre
‘It invests mainly in larger companies and the board is very cognisant of investors’ need for income. This means in hard years – like 2020 – they are happy to use the trust’s revenue reserves to maintain the dividend.
‘As a result the trust has increased its dividend payment for 54 consecutive years. If you are looking for income security, this trust is for you.’
On Fidelity Special Values, Darius said its manager Alex Wright’s investment style is best described as contrarian – that is on the opposite side of consensus, looking for stocks that are out of favour.
‘But, they must meet two strict criteria,’ he added. ‘The first is the preservation of investors’ capital which they aim to do by choosing companies with exceptionally cheap valuations or an asset, such as intellectual property or inventory, which has the potential to limit share price falls.
‘Secondly, they look for companies where there is a catalyst for significant earnings growth. Wright is a patient investor and is prepared to wait for stocks to deliver.’
Willis Owen’s Adrian Lowcock suggests Richard Bulla’s Franklin UK Mid Cap fund
Adrian Lowcock, head of personal investing at Willis Owen, recommends the £1.1billion Franklin UK Mid Cap fund (0.83 per cent).
Its manager, Richard Bulla, follows a process which involves a broad social and economic overview which helps the team to identify areas of opportunity.
Adrian said: ‘Potential Investments are identified following an assessment of the business, management and financials.
‘The team set price targets for each investment which are then sold when reached.
‘This focus on valuation means the portfolio looks very different from the benchmark.’
The fund’s top holdings include a mixture of housebuilders and industrial stocks which Adrian said should benefit from an economic recovery.
Finally, he also likes the £1.8billion JO Hambro UK Equity Income fund (1.29 per cent). Co-manager Clive Beagles considers the economic situation and identifies trends in the market to generate ideas while James Lowen focuses on detailed company analysis.
‘The duo combines their expertise to provide a contrarian fund investing for income,’ added Adrian.
‘Their approach has a long-standing bias towards mid and smaller companies – for an equity income fund – focusing on businesses which have above-average yields and attractive growth prospects.
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