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UK Growth sector

We believe this sector is blessed with a number of skilled and high-quality fund managers.

Dominic Rowles - Investment Analyst
30 July 2020

A fund investing in UK shares is often the first port of call for UK-based investors.

And for good reason. The UK stock market is home to many world-class companies. From international giants selling their products and services across the globe to a diverse array of smaller businesses.

The UK is a rich hunting ground for fund managers. UK Growth funds aim to grow the value of investors’ money over the long term, although each will go about this in different ways. Some focus on larger companies in the FTSE 100 Index, others invest in higher-risk smaller or medium-sized companies, and some have the flexibility to invest in companies of any size.

Similarly, some fund managers are more constrained than others. Some aim not to deviate significantly from the performance of the broader stock market. Others have more freedom to take risks – they might invest in a small number of companies, for example.

The overall makeup of the UK stock market is quite different to other global markets. For example, it includes more oil & gas and financial services companies than many of its peers. We think UK-focused funds can be used to diversify a portfolio of overseas funds. In particular, global funds tend to have a focus on the technology industry, an area that only makes up a small part of the UK market.

Our view

The UK is currently one of the world’s most unloved stock markets. The coronavirus crisis continues to cause uncertainty and there are still a variety of paths Brexit could take. It's possible we could see more volatility as details emerge.

However, we think many homegrown companies have the ability to survive uncertainty over the long run. Our stock market is truly diverse, with many companies making money both overseas and on home soil. Not only that, the UK is home to some exceptional fund managers with great track records of adding value. We think the UK is often a good starting point for investors, and most long-term growth portfolios should have some exposure.

The decision of which funds to invest in can be difficult. We’ve narrowed the field to those we think have the greatest long-term performance potential, which feature on the Wealth Shortlist.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Wealth Shortlist funds in this sector

Funds chosen by our analysts for their long-term potential

SEE THE WEALTH SHORTLIST

The coronavirus crisis has brought volatility to stock markets across the globe, and the UK is no exception. The UK stock market's fallen 17.5%* so far this year as investors contended with an unprecedented amount of uncertainty.

The worst of the share price falls happened in February and March. Shortly after, the UK government and Bank of England implemented an extensive package of measures designed to boost the UK economy. The UK stock market's risen since then but it's still some way behind where it was at the start of the year to 30 June.

Broadly speaking, smaller companies underperformed their larger peers in the first few weeks of the coronavirus crisis. They don’t tend to hold up as well as larger and more stable firms when conditions are more uncertain. But they've staged a stronger recovery than large companies since then. Remember past performance isn't a guide to the future and this is a short time period to measure performance.

Healthcare and utilities were some of the best performing sectors over the period. People need to take their prescribed medication and heat their homes regardless of what's happening in the broader economy. So investors were less concerned about the futures of these businesses.

The car making industry’s taken the worst hit, as investors were worried people would put off the decision to buy new cars until there's more economic certainty. Travel and leisure companies also performed poorly as widespread travel bans and the closure of national borders across the world put a halt on activity.

We think it’s sensible to invest in companies across a number of industries. This increases diversification and reduces the risk of being fully invested in a poorly performing area.

FTSE All-Share Performance in 2020

Past performance is not a guide to future returns. Source: Lipper IM*, correct as at 30/06/2020.

Going forward, and in the near term, stock markets are likely to remain sensitive to daily news flow about the virus. Even though we have seen some stability in markets more recently, investors will likely want more reassurance that we're approaching a peak in virus cases. Or that we continue to see backing from major global governments and central banks to support domestic demand and economic activity.

There will always be short-term volatility in stock markets, and things could get worse before they get better. But we suggest investors focus on the long term. In previous crises, those who invested in a diversified portfolio and held on to their investments for the long term have generally been rewarded. And long-term investors who saw share price weakness as an opportunity to add to existing investments at a more attractive price fared even better. Remember though that all investments fall as well as rise in value, so you could get back less than you invest.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our Wealth Shortlist features a number of funds from this sector, selected by our analysts for their long-term performance potential. The Shortlist is designed to help investors build and maintain diversified portfolios. To use the Shortlist to build your portfolio, you should be comfortable deciding if a fund fits your investment goals and attitude to risk. For investors who don't feel comfortable building and maintaining their own portfolio we offer ready-made solutions, which are aligned to broad investment objectives. For those who want extra help, you can also ask us for financial advice.

The fund reviews below are provided for your interest but are not a guide to how you should invest. For more information, please refer to the Key Investor Information for the specific fund. Remember all investments and income from them can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.

There is a tiered charge to hold funds with HL. It is a maximum of 0.45% p.a. - view our charges. Comments are correct as at 30 June 2020.

Wealth Shortlist fund reviews

Chris St John tries to grow investors' money over the long term by investing in high quality companies with the potential to benefit from economic trends. He invests in companies of any size, including higher-risk smaller ones.

The manager looks for themes that are likely to drive stock market growth over the long term and thinks about how they could change consumer behaviour. Current themes include increased life expectancy, applications of robotics and low-carbon economy solutions. Then he identifies companies likely to benefit as those themes develop over time. He tends to invest in companies with a number of common characteristics, including high barriers to entry for competitors, the ability to raise prices without impacting demand for their products or services and experienced senior management teams.

The fund's performed well over the long term. Our analysis puts this down to the manager's ability to invest in companies with bright futures ahead of them, whatever size they are or sector they're in. The manager has typically limited losses in turbulent times, although we'd expect the fund to lag the broader market when it rises quickly. Past performance is not a guide to the future.

Please note the AXA WF Framlington UK Fund is an offshore fund so investors will not be protected by the Financial Services Compensation Scheme.

This fund is managed by a team of four whose different strengths, styles and areas of focus are carefully blended together. They use a flexible approach and each manager is free to invest their portion of the portfolio wherever they see the best opportunities.

The managers have a good long-term track record but the fund hasn't done as well as the UK stock market over the past few years. The managers have tended to focus on companies whose share prices they believe don’t reflect their true worth, also known as value investing. These companies largely remained out of favour with other investors, which held back returns.

The blended approach used by the managers, combined with a focus on small and medium-sized companies, makes this fund different to many of its peers. We think it's managed by a strong team with the potential to deliver good returns over the long term. Their investments in smaller companies add risk though.

This fund aims to grow investors' money by investing in high-quality UK companies of all sizes. It invests more in small and medium-sized companies than most other UK funds. We think smaller companies have great long-term growth potential, but they are higher-risk

Chris Hutchinson and his team invest in companies that do something unique. The harder it is for competitors to replicate, the better. So a strong brand, intellectual property and a market-leading position are all positives. There aren't many companies that meet the manager's high standards and the fund currently invests in just 29 companies. This means each one has the potential to contribute meaningfully to the fund's performance, but it's a higher-risk approach.

The manager's long-term track record is impressive. Our analysis suggests he's added plenty of value through his ability to select companies with outstanding potential, regardless of their size or the sector they're in. We think the fund has the potential to do well over the long run, although there are no guarantees.

This fund aims to track the performance of the FTSE 100 – an index of the largest companies listed on the UK stock market.

The fund's made up of around 100 companies, focused towards sectors such as oil & gas, healthcare and financials. While these companies are based in the UK, many sell products and services across the globe, so they're not solely reliant on the UK economy to be successful. The fund's tracked its index tightly and efficiently since launch.

The managers have the flexibility to invest in derivatives which, if used, adds risk.

The fund aims to track the performance of the FTSE All-Share; a broad index of UK companies.

The fund invests in around 630 large, medium-sized, and higher-risk smaller companies based across the UK. Since launch it’s tracked its index tightly and efficiently.

Alex Wright is a contrarian. He looks for unloved and undervalued companies where other investors have overlooked the potential for growth or positive change. He'll invest in companies of any size, including higher-risk smaller ones.

Wright invests in companies that often go ignored by other investors. Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way, the company must be on the road to recovery. Corporate strategy plays an important part in a company's recovery so the manager spends lots of time meeting company managers.

As the company improves, its share price should rise as other investors begin to recognise the change. As the price rises, Wright gradually takes profits and moves on to the next unloved opportunity.

The manager's value-focused investment approach has been out of favour in recent years and the fund hasn’t done as well as the broader UK stock market since the manager took control in January 2014. This is disappointing, but not necessarily unexpected given the headwinds the fund's faced. We're encouraged it's outperformed the index of value-focused UK companies over that time.

The manager has the flexibility to invest in derivatives which, if used, adds risk.

Anthony Cross and Julian Fosh invest in companies with barriers to entry from competition including intellectual property (such as patents, trademarks or brands), established distribution channels and significant levels of repeat business. They invest in UK businesses of all sizes, including higher-risk smaller ones.

The fund's done well since the managers took control in March 2009, significantly outperforming the broader UK stock market. Our analysis puts this down to the managers' ability to select companies with bright futures ahead of them. The fund's focus on high quality companies means it's tended to lag the broader stock market when it has risen quickly, but held up better when markets turned negative, although past performance isn't a guide to the future.

We think the fund's run by two experienced managers with a robust investment process that's served them well over the years. We therefore expect it to deliver good returns over the long term, although there are no guarantees. The managers have the flexibility to invest in derivatives which, if used, adds risk.

Please note this fund invests in Hargreaves Lansdown plc.

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Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

Fund research

Our expert research team provide regular updates on a wide range of funds.

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