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UK stock market and funds review – how’s the UK coping?

After an eventful 2020, we look at how the UK economy’s fared, how UK funds have coped with coronavirus and share our outlook for the future.

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.

Dominic Rowles
Investment Analyst

Published on 29 January 2021

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Covid-19 caused mayhem throughout 2020, and its impact on our lives will be felt for years to come.

But in November we got the news the world hoped for. US pharmaceutical giant Pfizer announced it had developed a vaccine with over 90% effectiveness. The positive news saw the UK stock market jump more than 5%. Days later, Moderna and AstraZeneca announced their own vaccines, also with surprisingly high rates of effectiveness.

While vaccine roll outs are well under way, we’re not out of the woods yet. Distributing the vaccine is a major job, and it’s expected to take months before the country’s most vulnerable people are vaccinated.

How’s the UK economy fared?

After November’s national lockdown and the introduction of tougher Tier 4 restrictions in England, it was expected that the UK economy would shrink. It did, by around -2.6%, although this wasn’t as much as initially expected.

The government borrowed a record £394bn over the year as it tried to minimise the damage caused to the economy by the pandemic. Meanwhile, the Bank of England kept record-low interest rates of 0.1% and ramped up its bond buying program to try to relieve pressure on businesses and households.

Despite the efforts from both the government and the Bank of England, the Office for Budget Responsibility predicts the economy shrank 11.3% in 2020. It isn’t expected to return to pre-pandemic levels until the end of 2022 either.

Decisions like increasing personal taxes have been put to the side for the time being. Not just because voters have little appetite for them at the moment, but because the chancellor doesn’t think the economy has the strength to digest them right now.

The labour market is under pressure too. By the end of 2020, the number of people made redundant reached record highs. As the government’s furlough scheme comes to an end this year, unemployment is expected to continue rising.

It wasn’t all bad news on the jobs front though. Job vacancies seem to be on the rise, although they’re still some way behind levels before the pandemic hit.

In other news, the UK and European Union ended years of Brexit uncertainty by agreeing a trade deal. Despite the deal, businesses will have to adapt to new ways of working and an increase in red tape. This will include things like new border quality checks and customs declarations, which could cause a drag on future growth in the economy.

Does this change the outlook for the UK?

The UK stock market is likely to stay sensitive to daily headlines about the Covid-19 pandemic. While we’ve seen some stability in markets more recently, investors will likely want more reassurance the vaccine is being rolled out effectively, and new infection rates are falling.

Our long-term outlook for the UK remains positive though. The UK stock market is diverse, with lots of companies making money overseas and on home soil. That means they don’t just rely on the UK economy to perform well.

Investors can choose from global leaders in sectors like consumer goods and pharmaceuticals, through to higher-risk smaller companies operating in cutting-edge industries, aiming to become the giants of tomorrow. In the middle there’s a whole host of medium-sized companies, which have both the advantages of scale, with room to grow quickly.

There are also a number of exceptional fund managers who we think are able to make the most of what the UK stock market has to offer.

As ever, we think investors should hold a mix of investments. Having a number of investments across a range of sectors, geographies and investment types gives you the best chance to succeed over the long term.

This article isn’t personal advice. If you're not sure if an investment is right for you, please ask us about our advisory services. All investments will rise and fall in value, so you could get back less than you invest.

How have UK funds performed?

The UK stock market fell 9.8% last year. The IA UK All Companies and UK Equity Income sectors fell 6.2% and 10.8%. Higher-risk smaller companies outperformed their large and medium-sized peers, benefiting funds with more invested in this area.

Funds with a focus on companies capable of above-average growth (often measured in earnings or cash flow), sometimes known as 'growth' companies, also did well. These companies were favoured for their more defensive characteristics, like their potential to have stable earnings and more reliable dividends. On the other hand, 'value' focused funds did poorly despite a partial recovery towards the end of the year. Their aim is to invest in companies whose share prices don’t reflect their actual worth.

One of the best-performing UK funds over the year was Premier Miton UK Smaller Companies, managed by experienced duo Gervais Williams and Martin Turner. We think the managers’ ability to select companies with outstanding prospects boosted returns. One of the fund’s strongest performers was biotechnology business Avacta Group. Its share price rose significantly after positive news, including progress in the development of a Covid-19 antigen test. Remember past performance isn’t a guide to the future.

The fund has the potential to do well in future. But UK Smaller Companies is a competitive sector with lots of managers who’ve shown an ability to add value for investors. Overall, we’re happy with our current Wealth Shortlist line-up in this area.

Annual % growth	Dec 2015 – Dec 2016	Dec 2016 – Dec 2017	Dec 2017 – Dec 2018	Dec 2018 – Dec 2019	Dec 2019 – Dec 2020
Premier Miton UK Smaller Companies	4.2	21.5	-8.5	-14.0	77.3
FTSE All-Share	16.8	13.1	-9.5	19.2	-9.8

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2020.

More about Premier Miton UK Smaller Companies including charges

Premier Miton UK Smaller Companies key investor information

What the research team have been doing

We met several UK fund managers via video call over the past three months including Anthony Cross and Julian Fosh, managers of the Liontrust Special Situations and UK Growth funds. They invest in companies with a sustainable edge over the competition, it is hoped that will help them earn above-average profits for the long-term.

The managers recently invested in media business Future. The company specialises in taking print-based media publications and digitising the content to allow it to reach more people. It recently acquired a portfolio of well-known magazines, including Horse & Hound, Country Life and Homes & Gardens.

The managers think the company has strong intellectual property, including its creative content, data and technology platform. It also has a strong distribution network. It's estimated that the company's content reaches one in three people in the UK and the US.

We also met Simon Brazier, manager of the Ninety One UK Alpha fund. He believes in companies with strong online offerings. This includes companies like clothes retailer Next and airline EasyJet. What they have in common is their potential to emerge from the pandemic as stronger businesses, benefiting from the decline of their weaker competitors.

How have Wealth Shortlist funds performed?

Our Wealth Shortlist selections delivered mixed performance last year, in line with the UK stock market as a whole. We usually expect this from the range of funds on the list.

If all your funds in a sector are performing well at the same time, they're probably investing in similar areas. That's great when those areas are in favour but can be painful when they're not. Make sure to take a diversified approach when investing. This means choosing a good mix of managers who have a variety of strengths, styles and areas of focus.

UK Growth

The best-performing Wealth Shortlist fund in the UK Growth sector was AXA WF Framlington UK. It beat the performance of the UK stock market and its peers in the IA UK All Companies sector, although it still lost money. We think the manager’s ability to select outstanding companies, regardless of what sector they’re in, boosted performance. His growth-focused investment style also helped performance. Past performance isn’t a guide to future returns.

The weakest performer was Fidelity Special Situations. Fund manager Alex Wright looks for companies ignored by other investors. Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way, Wright will buy shares if he thinks the business will be able to recover.

This value-style approach has been out of favour, and the fund underperformed both the wider UK stock market and its peers in the same sector over the past year. This is disappointing, but we're encouraged it outperformed an index of value-focused UK companies over the period.

Annual % growth	Dec 2015 – Dec 2016	Dec 2016 – Dec 2017	Dec 2017 – Dec 2018	Dec 2018 – Dec 2019	Dec 2019 – Dec 2020
AXA WF Framlington UK	N/A	18.1	-12.4	30.1	-3.8
Fidelity Special Situations	14.4	15.4	-13.5	21.7	-12.0
LF Majedie UK Equity	21.3	6.2	-9.6	14.3	-6.9
Liontrust UK Growth	18.1	14.2	-6.1	19.9	-8.3
Unicorn Outstanding British companies	4.2	10.2	-5.3	21.6	-12.1
FTSE All-Share	16.8	13.1	-9.5	19.2	-9.8
IA UK All Companies	11.2	14.1	-11.2	22.5	-6.2

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2020. N/A – full year performance data is not available.

LF Majedie UK Equity and Liontrust UK Growth currently hold shares in Hargreaves Lansdown Plc.

Find out more about AXA WF Framlington UK, including charges

AXA WF Framlington UK Key Investor Information

Find out more about Fidelity Special Situations, including charges

Fidelity Special Situations Key Investor Information

Find out more about LF Majedie UK Equity, including charges

LF Majedie UK Equity Key Investor Information

Find out more about Liontrust UK Growth, including charges

Liontrust UK Growth Key Investor Information

More about Unicorn Outstanding British companies, including charges

Unicorn Outstanding British Companies Key Investor Information

UK Equity Income

UK Equity Income funds haven’t held up as well as UK Growth funds over the past year. Lots of equity income funds tend to focus on companies in the oil & gas and financials sectors. They’ve historically paid high dividends but struggled more as a result of the pandemic.

On the other hand, equity income funds tend to invest less in the technology sector because of the lower dividends on offer. Not investing so much in technology businesses, which have held up relatively well, proved painful.

The strongest performer in the UK Equity Income sector of the Wealth Shortlist over the last year was Aviva Investors UK Listed Equity Income, although it still lost money. The managers invest in companies they believe have a competitive advantage over their peers, with the potential to pay high dividends. Performance was boosted by the managers’ strong stock picking, which were mainly in financial and industrial sectors.

The Jupiter Income fund didn’t do quite as well, as Ben Whitmore's value-focused investment approach stayed out of favour. However, he's one of the most experienced managers investing the way he does.

All fund managers go through periods where their investment style is out of favour. They could recover and go on to deliver a strong performance over the long term, although that isn’t guaranteed. The manager's experience and successful track record give us confidence in the fund's long-term prospects.

Annual % growth	Dec 2015 – Dec 2016	Dec 2016 – Dec 2017	Dec 2017 – Dec 2018	Dec 2018 – Dec 2019	Dec 2019 – Dec 2020
Artemis Income	10.5	12.6	-9.8	23.0	-6.7
Aviva Investors UK Listed Equity Income	10.5	12.2	-10.8	22.9	-6.2
Jupiter Income	19.7	10.2	-7.7	12.8	-17.9
Marlborough Multi Cap Income	-3.2	18.8	-13.6	26.8	-12.4
Threadneedle UK Equity Income	N/A	N/A	-6.2	20.7	-6.8
Troy Trojan Income	N/A	N/A	-7.0	20.6	-9.5
FTSE All-Share	16.8	13.1	-9.5	19.2	-9.8
IA UK Equity Income	8.8	11.4	-10.5	19.9	-10.8

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2020. N/A – full year performance data is not available.

Troy Trojan Income currently hold shares in Hargreaves Lansdown Plc.

Find out more about Artemis Income, including charges

Artemis Income Key Investor Information

More about Aviva Investors UK Listed Equity Income, including charges

Aviva Investors UK Listed Equity Income Key Investor Information

Find out more about Jupiter Income, including charges

Jupiter Income Key Investor Information

Find out more about Marlborough Multi Cap Income, including charges

Marlborough Multi Cap Income Key Investor Information

Find out more about Threadneedle UK Equity Income, including charges

Threadneedle UK Equity Income Key Investor Information

Find out more about Troy Trojan Income, including charges

Troy Trojan Income Key Investor Information

UK Small and Mid-sized Companies

Marlborough UK Micro-Cap Growth was the best-performing fund in the UK Small and Mid-sized Companies sector of the Wealth Shortlist, rising an impressive 22.7% over the past year*. The fund’s well-regarded lead manager, Giles Hargreave, recently stepped back from full-time fund management, but we still have conviction in the broader team, which has an excellent long-term track record. Remember though, past performance isn’t a guide to the future.

Franklin UK Mid Cap was the weakest performer in the sector, although it focuses almost entirely on medium-sized UK businesses, which underperformed their smaller counterparts. Our analysis suggests the manager's stock picking held back returns. But we still have conviction in the fund's long-term prospects.

While smaller companies might be able to grow faster, there's no guarantee and they are higher-risk then their larger counterparts.

Annual % growth	Dec 2015 – Dec 2016	Dec 2016 – Dec 2017	Dec 2017 – Dec 2018	Dec 2018 – Dec 2019	Dec 2019 – Dec 2020
Franklin UK Mid Cap	N/A	26.7	-13.3	42.6	-14.0
Marlborough UK Micro-Cap Growth	15.1	33.3	-10.1	21.2	22.7
TB Amati UK Smaller Companies	15.6	36.2	-6.3	30.3	8.9
FTSE 250 (excluding investment trusts)	5.1	18.2	-15.2	30.8	-8.5
FTSE Small Cap (excluding investment trusts)	12.5	15.6	-13.8	17.7	1.7
IA UK Smaller Companies	8.5	26.7	-11.8	26.2	7.3

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2020. N/A – full year performance data is not available.

Find out more about Franklin UK Mid Cap, including charges

Franklin UK Mid Cap Key Investor Information

More about Marlborough UK Micro-Cap Growth, including charges

Marlborough UK Micro-Cap Growth Key Investor Information

Find out more about TB Amati UK Smaller Companies, including charges

TB Amati UK Smaller Companies Key Investor Information

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