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Investing in the UK - why we like the unpopular

We look at the benefits of investing in unloved markets.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

There's no sure-fire way to make a profit when it comes to investing. But often the best way to make money is to invest in areas that others have shunned.

Markets have a habit of drawing investors in during the good times, when share prices have reached new highs and the economic outlook seems brighter.

On the flipside, investors are more likely to run for the door when markets have been weak and the media churns out stories of economic and political disappointment.

This can be a risky mistake. Sentiment towards unloved areas of the market can change quickly - you could miss out if you're not invested, if and when share prices recover.

All investments can fall as well as rise in value and you could get back less than you put in.

In investing, what is comfortable is rarely profitable

ROB ARNOTT

Where’s the value?

It's probably not the first time you've heard the UK is now the most unloved major stock market in the world. Brexit and the potential for a change in government, which is likely to bring with it a new business environment, are high on investors' list of concerns. Companies reliant on the health of the UK economy and UK consumers have been hit particularly hard by the negative sentiment.

We think there’s an opportunity. It might not be a smooth ride over the coming years, but we think lots of companies are built to survive most economic and political conditions.

And a lot of companies focused on the domestic economy, rather than global trade, can be bought at attractive valuations. You can buy their shares at a lower price than their future growth prospects would suggest. In the past, buying lowly valued shares has led to good long-term returns, though this won't always be the case as some companies will struggle to recover.

In the long run we think investors will be rewarded for their patience. Here I've chosen two funds I believe could appeal to investors looking to take advantage and build their exposure to the UK.

Jupiter Income

Ben Whitmore is a true contrarian. In his Jupiter Income Fund he's prepared to invest in companies in some of the most unpopular areas of the UK market. This allows him to buy shares at an attractive price, which could rise once the company recovers or comes back to favour.

He's prepared to be patient and, while waiting for a recovery, he aims to benefit from the attractive, and hopefully growing, dividends these companies pay. Once they return to favour, he'll take the profits and move on to the next unloved opportunity.

The manager has recently focused on the mining, food retailing, and energy sectors, where he's found some of the UK's most lowly valued companies. He wants to keep the fund diversified though, so he also invests in other areas.

Advertising and media company WPP is a recent addition to the fund. The share prices of advertising agencies have typically been weak over the past year, partly because a number of consumer goods companies have come under pressure to cut costs in order to improve profits and a quick way to do so is to cut advertising. Ben Whitmore thinks WPP has been wrongly shunned – he sees it as a high quality business that generates high returns and is in good financial health.

The manager has stuck to his process through thick and thin and it’s led to good long-term results. An attractive yield of 4.0% is likely to appeal to income investors, though yields aren’t a reliable indicator of future income. Those who don't need the income can reinvest any dividends to boost future growth. Please note charges are taken from capital which can increase the yield but reduce the potential for capital growth.

Jupiter Income - five year performance

Past performance isn’t a guide to the future. Source: Lipper IM to 31/03/2018

Annual percentage growth
Mar 2013 -
Mar 2014
Mar 2014 -
Mar 2015
Mar 2015 -
Mar 2016
Mar 2016 -
Mar 2017
Mar 2017 -
Mar 2018
Jupiter Income 10.8% 10.0% -1.5% 21.4% -1.4%
FTSE All-Share 8.8% 6.6% -3.9% 22.0% 1.2%

Past performance isn’t a guide to the future. Source: Lipper IM to 31/03/2018

Jupiter Income Key Investor Information

Find out more about Jupiter Income, including charges and how to invest

HSBC FTSE 250 Index

This fund invests in medium-sized companies, or 'mid-caps'. These businesses are generally nimble enough to offer exciting growth potential during the good times, but mature enough to limit some of the volatility associated with investing in even smaller businesses.

Mid-caps tend to earn more of their profits from the UK than larger firms, which often carry out business worldwide. That means their success is usually more dependent on how well the UK economy is performing.

Mid-caps have been weaker than small and larger firms since the referendum in June 2016, but over the longer-term they've delivered great returns. This isn’t a guide to future returns though.

We don't think investors should be so quick to dismiss this part of the market. The HSBC FTSE 250 Index is one of our favoured choices to invest in this area and it invests in a broad and diversified range of companies.

The fund tracks the performance of the FTSE 250 by investing in every stock in the index. It's also available at a low ongoing fund charge of just 0.09%, which should help ensure it tracks the index as closely as possible. The HL charge of up to 0.45% per year also applies.

Over the past five years the fund’s delivered returns of 56.3%, although past performance isn’t a guide to the future.

HSBC FTSE 250 Index - five year performance

Past performance isn’t a guide to the future. Source: Lipper IM to 31/03/2018

Annual percentage growth
Mar 2013 -
Mar 2014
Mar 2014 -
Mar 2015
Mar 2015 -
Mar 2016
Mar 2016 -
Mar 2017
Mar 2017 -
Mar 2018
HSBC FTSE 250 Index 19.1% 8.1% 0.9% 14.3% 5.3%
FTSE All-Share 8.8% 6.6% -3.9% 22.0% 1.2%

Past performance isn’t a guide to the future. Source: Lipper IM to 31/03/2018

HSBC FTSE 250 Index Key Investor Information

Find out more about HSBC FTSE 250 Index, including charges and how to invest

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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