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Three reasons to be positive about UK companies

Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice. Once held in a SIPP money is not usually accessible until age 55 (rising to 57 in 2028).


Dominic Rowles

Investment Analyst

Why invest in the UK?

The UK is home to some truly world-class companies, from multinational household names, listed in London but doing business across the world, to innovative, higher-risk smaller companies exploiting profitable niches at home.

But pessimism around Brexit has made some investors nervous about the UK. This could spell opportunity, as it means UK shares are modestly valued relative to the profits they’re making.

Here we explain why we think it’s a mistake to overlook the UK market. We look at three compelling reasons for investors to back British businesses, and two ways you could take advantage.

Reason #1: Great companies

It’s easy to underestimate and overlook opportunities on our doorstep, but the UK stock market is more diverse and more exciting than many investors assume.

You can choose from global leaders in fields like consumer goods and pharmaceuticals, through to higher-risk smaller firms operating in cutting-edge industries and aiming to become the giants of tomorrow.

In the middle there’s a whole host of medium-sized firms which combine some advantages of scale with the capacity for rapid growth.

Reason #2: International diversification

The UK stock market is an international feast.

Britain's biggest businesses earn, on average, three quarters of their revenue overseas. This means they are often sheltered from issues affecting a specific location or currency.

Reason #3: Attractive valuations

The UK stock market has performed well over the past year.

But it’s also lagged its global peers, and relative to their earnings potential many companies now look good value.

The chart below shows our favourite measure of value - the cyclically-adjusted P/E ratio (CAPE) for the UK market, along with the average over time. You can see current valuations are below average, and investing when valuations are low gives you a better chance of long-term success, though there are no guarantees.

UK market looks good value

Past performance is not a guide to future returns.

Source: HL to 30/11/17

Our latest suggestions for investing in the UK

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One way to tap into the UK's potential

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Dominic Rowles

Investment Analyst

One way to tap into the UK’s potential

We think the UK’s growth potential is best harnessed by investing with a dedicated and experienced stock-picker.

The HL Select UK Growth Shares Fund is managed by our in-house experts Steve Clayton and Charlie Huggins. It recently reached its one year anniversary and we’re extremely pleased with its performance so far – though as ever past performance isn’t a guide to the future.

Below Steve lifts the lid on his investment approach and explains why he’s excited about the fund’s future prospects.

Steve Clayton

Head of Equity Funds

When we launched the fund, the idea was simple.

There’s a virtuous circle that supports financially strong businesses with exceptional products and services.

Loyal customers, willing to pay premium prices, can deliver healthy profit margins and strong cash flow. This lets companies reinvest without relying on banks to fund them, and many can grow year after year.

We also wanted people who bought our fund to know how their money’s invested and why. So we write regular blogs and tell investors exactly which stocks we’ve bought and our reasons for buying them.

HL Select UK Growth Shares Fund

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Our portfolio for growth - HL Select UK Growth Shares Fund

We currently hold 25 to 30 stocks. We want to back our conviction, so each company can make a real difference to the fund’s returns. But investing so differently from the wider market also increases the risk of underperformance.

We pay no attention to a company’s size. We hold a number of global giants, but also invest heavily in medium-sized and higher-risk smaller companies. This is where we tend to find the most compelling growth prospects.

The fund’s early performance has been promising, but we don’t always get it right. A handful of holdings haven’t delivered so far. In most cases we’re still positive on their prospects though. We’ve added to our positions in Domino`s Pizza and Auto Trader to hopefully take advantage of lower prices.

As ever please remember that performance isn’t a guide to future returns. Like all stock market investments the fund’s value can fall as well as rise, so you could get back less than you put in.

We’re long-term investors and expect to hold most of our positions for many years to come. The effects of compounding are powerful. If a business can keep growing reliably, over time, it can significantly increase in value.

Performance since launch

Past performance is not a guide to future returns.

Source: HL to 01/12/17

Annual % growth
(income reinvested)
Dec 12-13 Dec 13-14 Dec 14-15 Dec 15-16 Dec 16-17
HL Select UK Growth Shares n/a* n/a* n/a* n/a* 22.0
FTSE All-Share 19.8 3.7 2.2 8.7 13.4
IA UK All Companies sector 25.0 2.8 5.7 5.0 15.4

Past performance is not a guide to future returns.

*Full year performance not available

Source: Lipper IM to 01/12/17

The HL Select UK Growth Shares Fund is run by our sister company HL Fund Managers Ltd.

Themes running through the fund

Global strength

Many of our companies are global leaders with high market shares, robust distribution networks and proven brands.

Unilever and Reckitt Benckiser have been selling their shampoos, ice creams, disinfectants and headache cures for decades. Trusted brands create pricing power, leading to big margins and the strength to keep reinvesting in the business.

Technology innovators

Companies like Rightmove and Auto Trader have used the internet to dominate markets that used to belong to the classified ads.

Domino’s Pizza has grown market share by adopting technology early, and it now gets most of its orders online. Just Eat has connected takeaway outlets to hungry people, delivering large servings of growth along with the curries, chop sueys and pizzas.

All these companies generate strong profits and cash flows they can reinvest into widening and deepening their competitive moats.

One-offs

Some of our businesses are quite unlike any others. Burford Capital dominates the world of commercial litigation funding, backing law suits in return for a share of the proceeds. The business may be unique, but the flow of legal disputes around the world is unlikely to dry up.

Repeat revenue

A great way of strengthening the virtuous circle is to make, or do, something your clients will commit to again and again. If a business can rely on most of what it earned last year coming back through the door this year, any new sales are likely to grow the business, not just replace lost customers. That’s a great starting point for growth.

Top ten contributions to the fund's performance

Company Contribution to fund's return (% points) Share price movement since purchase
Burford Capital 3.8 161%
GB Group 1.9 71%
Intertek 1.8 61%
Ascential 1.2 35%
Just Eat 1.2 36%
Intercontinental Hotels 1.1 36%
RELX 1.1 30%
Unilever 1.0 37%
Burberry Group 1.0 24%
Sanne Group 0.9 38%

Past performance is not a guide to future returns.

Source: Lipper IM, to 01/12/2017
The passive option - tracking the performance of a market at low cost

Looking to the future

It’s early days for the fund.

But we think there are some powerful drivers underpinning the businesses in the portfolio and we’re excited about their prospects.

The strongest companies have great control of their destiny, and often earn their revenues all over the world, making them resilient in the face of any trouble at home.

We don’t hear much about Brexit from the companies we hold. Our philosophy has always been to search for businesses that grow strongly in the good times and are resilient when the going gets tough.

Fund information

Investment goal: Growth
Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.60% p.a.
Vantage service charge: 0.45% p.a.
Maximum overall charge: 1.05% p.a.

View Key Investor Information Document

View our charges

HL Select UK Growth Shares Fund

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Kate Marshall

Senior Investment Analyst

The passive option

If you’d rather take a passive approach to investing, tracking the performance of a market at low cost, there are also a number funds available which allow you to invest in the entire UK stock market.

Our favourite is the Legal & General UK Index Fund.

It tracks the performance of the FTSE All Share Index, which contains over 650 large, medium-sized and higher-risk smaller UK companies.

This means whichever part of the market is performing well at any given time, some of your money will be invested there. Like all stock market investments its value can fall so you could make a loss.

We’ve chosen this fund because it has a good record of tracking the index closely in the past. It also has an extremely low fund charge of just 0.06% p.a. when you invest through Hargreaves Lansdown. This is in addition to our charge to hold funds, which is a maximum of 0.45% p.a.

We think it could make an excellent choice as a simple investment where your money is spread across the whole of the UK stock market.

Annual % growth
(income reinvested)
Nov 12-13 Nov 13-14 Nov 14-15 Nov 15-16 Nov 16-17
Legal & General UK Index 19.2 3.3 0.9 9.6 13.2
FTSE All-Share 19.8 4.7 0.6 9.8 13.4

Past performance is not a guide to future returns.

Source: Lipper IM, to 30/11/2017

Fund information

Investment goal: Growth
Net initial charge: 0.00%
Ongoing charge (OCF/TER): 0.10% p.a.
Ongoing saving from HL: 0.04% p.a. i
Net ongoing charge: 0.06% p.a.
Vantage service charge: 0.45% p.a.
Maximum overall charge: 0.51% p.a.

View Key Investor Information Document

View our charges

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Legal & General UK Index

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