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UK stock market and funds review – is the worst of the pandemic behind us?

After a strong start to 2021, we look at what’s been happening in the UK economy, how the stock market’s coping, and how UK funds are faring.

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 23 April 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 continued to dominate headlines in the first three months of 2021 and, sadly, the UK’s death toll marched higher. The total number of Covid-related deaths passed the grim milestone of 100,000 in January and reached 126,000 by the end of March.

Thankfully, the UK’s implemented one of the most successful vaccine rollout programmes in the world. At the end of March, 47% of the population had received the first dose, and 7% were fully vaccinated.

Lots of investors now feel the worst is behind us. The UK stock market rose sharply in response, as did the pound against most major currencies.

What’s been happening in the economy?

The start of March saw one of the biggest events in the UK’s economic calendar – the Chancellor’s Budget. In the Budget, Chancellor Rishi Sunak announced a range of measures to help keep our economy moving. From extending the furlough scheme, the universal credit uplift and support for the self-employed, to freezing alcohol and fuel duties.

Of course, the Chancellor’s measures come at a cost – a cost that will one day need to be repaid. Sunak did announce some government revenue-raising measures, including a freeze in the personal tax allowance, inheritance tax thresholds, pensions lifetime allowances and capital gains tax allowances. But that won’t make much of a dent in the hundreds of billions of pounds of Covid spending that’s been racked up. This year alone, the UK Government expects to borrow £355bn, a peacetime record.

Sunak confirmed that the UK economy fell 10% in 2020, but is expected to rise 4% this year, and return to pre-Covid levels by the middle of 2022.

What about the stock market?

Since our last review three months ago, the UK stock market has risen 5.2%, beating other European markets and the broader global stock market. Large and medium-sized UK companies posted solid gains of 5.0% and 6.9% respectively, but smaller companies eclipsed their larger peers, rising 16.3%. Remember, past performance isn’t a guide to future returns and smaller companies are higher risk than their larger counterparts.

The UK stock market was boosted by investor optimism stemming from plans to gradually reopen the economy and the success of the UK’s vaccination programme. When investors are optimistic about the future, smaller companies tend to perform best, because they’re more sensitive to the health of the economy.

Over the past year to the end of March 2021, the UK stock market rose 26.7%. But you should remember that the past year excludes March 2020, when the market fell sharply in response to the coronavirus crisis. While the market has recovered since then, it’s still down 5.1% since the beginning of 2020 – we think this highlights the danger of looking at one period of performance in isolation.

At a sector level, lots of the UK stock market’s weakest sectors in 2020 are among the strongest so far this year. That includes oil & gas, telecoms, financials and consumer services businesses. Meanwhile the basic materials sector has been a strong performer both in 2020 and the year to date. The sector’s been boosted by the strong performance of mining companies, which benefited from rising metals prices.

FTSE All Share sector performance

Past performance is not a guide to the future. Source: Lipper IM, to 31/03/2021.

How have UK funds performed?

Over the past year to the end of March 2021, the IA UK All Companies and UK Equity Income sectors rose 37.9%* and 32.6% respectively, significantly beating the UK stock market. The IA UK Smaller Companies sector rose an impressive 67.1% but couldn’t match the broader market of UK smaller companies.

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. This followed a particularly tough 2019 though. 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, although past performance isn’t a guide to the future. Please note this fund is currently closed to new investors.

Marlborough Nano-Cap Growth was also a strong performer, boosted by the managers’ ability to select companies with outstanding prospects. We hold the team behind this fund in high regard, but currently prefer to access their skills through other funds. The focus on smaller companies, including unquoted companies, makes this a higher risk fund.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, please ask for financial advice.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio. You can find out more about a fund’s risks in the key investor information provided below.

Annual percentage growth
	Mar 16 - Mar 17	Mar 17 - Mar 18	Mar 18 - Mar 19	Mar 19 - Mar 20	Mar 20 - Mar 21
Premier Miton UK Smaller Companies**	14.9%	13.2%	-13.5%	-25.7%	160.6%
Marlborough Nano-Cap Growth	24.6%	-21.0%	4.8%	-23.0%	115.4%
IA UK Smaller Companies	19.1%	14.4%	-2.5%	-17.5%	67.2%

Past performance is not a guide to the future. Source: *Lipper IM, to 31/03/2021. **Soft closed.

PREMIER MITON UK SMALLER COMPANIES KEY INVESTOR INFORMATION

MORE ABOUT MARLBOROUGH NANO-CAP GROWTH INCLUDING CHARGES

MARLBOROUGH NANO-CAP GROWTH KEY INVESTOR INFORMATION

How have Wealth Shortlist funds performed?

Our Wealth Shortlist selections delivered mixed performance over the past year, although we usually expect this from a diversified range of funds.

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 Fidelity Special Situations. The manager’s value-focused investment style, which involves investing in companies overlooked by other investors, has been out of favour for several years and performed particularly poorly during the onset of the coronavirus pandemic. It’s recovered strongly since then though, demonstrating the benefits of retaining a diversified portfolio.

In contrast, Unicorn Outstanding British Companies was a weaker performer, despite delivering a return of 18.7%* over the period. The manager tends to invest in more growth-focused businesses, which went out of favour in recent months. Even given this headwind though, the fund’s performance was weaker than we’d expect, given the type of companies it invests in. This suggests the manager’s stock picking held back returns.

We continue to hold Chris Hutchinson in high regard and are encouraged by the strength of his long-term track record. We believe his fund has the potential to do well over the long run.

Annual percentage growth
	Mar 16 - Mar 17	Mar 17 - Mar 18	Mar 18 - Mar 19	Mar 19 - Mar 20	Mar 20 - Mar 21
Fidelity Special Situations	21.5%	4.4%	1.2%	-27.8%	46.7%
Unicorn Outstanding British Companies	9.4%	7.1%	2.7%	-13.5%	18.7%
FTSE All-Share	22.0%	1.2%	6.4%	-18.5%	26.7%
IA UK All Companies	18.1%	2.8%	2.9%	-19.2%	37.9%

Past performance is not a guide to the future. Source: *Lipper IM, to 31/03/2021

MORE ABOUT FIDELITY SPECIAL SITUATIONS, INCLUDING CHARGES

FIDELITY SPECIAL SITUATIONS KEY INVESTOR INFORMATION

MORE ABOUT UNICORN OUTSTANDING BRITISH COMPANIES, INCLUDING CHARGES

UNICORN OUTSTANDING BRITISH COMPANIES KEY INVESTOR INFORMATION

UK Equity Income

The strongest performer in the UK Equity Income sector over the past year was Aviva Investors UK Listed Equity Income. 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, mainly in the financial and industrial sectors.

Troy Trojan Income was a weaker performer. The team behind this fund looks for larger businesses that can grow steadily for years to come. The fund is relatively defensive in nature, so held up well during the initial coronavirus-related sell off. However, the fact it invests less in more cyclical companies (ones that rely more on the health of the economy to do well) meant it didn’t recover as quickly as some other UK equity income funds.

No fund performs well in all stock market conditions though, and we continue to believe this fund could form part of a well-diversified income portfolio.

Annual percentage growth
	Mar 16 - Mar 17	Mar 17 - Mar 18	Mar 18 - Mar 19	Mar 19 - Mar 20	Mar 20 - Mar 21
Aviva Investors UK Listed Equity Income	15.0%	1.3%	3.7%	-19.3%	37.0%
Troy Trojan Income	N/A	N/A	9.3%	-10.5%	10.7%
FTSE All-Share	22.0%	1.2%	6.4%	-18.5%	26.7%
IA UK Equity Income	14.9%	0.4%	3.4%	-20.7%	32.6%

Past performance is not a guide to the future. Source: Lipper IM, to 31/03/2021

N/A = performance for this time period isn’t available.

Troy Trojan Income currently hold shares in Hargreaves Lansdown plc.

MORE ABOUT AVIVA INVESTORS UK LISTED EQUITY INCOME, INCLUDING CHARGES

AVIVA INVESTORS UK LISTED EQUITY INCOME KEY INVESTOR INFORMATION

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 88.3%* over the past year. Guy Feld and Eustace Santa Barbara recently took control of the fund following Giles Hargreave’s decision to step back from full time fund management. 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 and smaller companies are higher risk.

Franklin UK Mid Cap was the weakest performer in the UK small and mid-sized companies’ sector of the Wealth Shortlist. The fund focuses almost entirely on medium-sized UK businesses which underperformed their smaller counterparts. Our analysis suggests the manager's stock picking also held back returns. But we still have conviction in the fund's long-term prospects.

Annual percentage growth
	Mar 16 - Mar 17	Mar 17 - Mar 18	Mar 18 - Mar 19	Mar 19 - Mar 20	Mar 20 - Mar 21
Franklin UK Mid Cap	9.7%	15.7%	-1.1%	-16.1%	39.2%
Marlborough UK Micro-Cap Growth	24.1%	21.1%	-3.0%	-19.1%	88.3%
FTSE 250 (excluding investment trusts)	13.6%	5.6%	-0.9%	-21.2%	47.5%
FTSE Small Cap (excluding investment trusts)	19.7%	2.2%	-3.1%	-24.4%	74.9%
IA UK Smaller Companies	19.1%	14.4%	-2.5%	-17.5%	67.2%