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UK stock market and funds review – on the road to recovery

We look at what’s been happening in the UK economy, how the stock market’s coping, and how our Wealth Shortlist funds have fared.

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.

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 remained the main talking point in the three months to the end of June 2021. Thankfully, the UK’s vaccination effort is among the most successful anywhere in the world. Over two thirds of the population have received the first dose, and almost half are fully vaccinated. It’s expected that every UK adult will have had the chance to receive both doses by mid-September.

While Covid-19 cases are on the rise again in the UK, with tens of thousands of new infections per day, hospitalisations and deaths have remained relatively low. That’s thanks to the UK’s vaccination success so far.

As a result, the government’s chosen to relax lots of the rules introduced to prevent the spread of the virus, like social distancing, mask wearing and limits on socialising. All businesses that remained closed, like theatres and nightclubs, were also able to reopen from 19 July.

What’s happening in the UK economy?

The economic recovery is well underway. But all this increased activity in the economy has caused prices to surge. This has left investors asking if these higher prices are going to be short lived or if they’re here to stay.

The Consumer Price Index (CPI) measure of inflation rose to 2.5% in June – that’s the highest it’s been since August 2018. Petrol price rises are partly to blame, as life returning to normal around the world has boosted demand globally.

Lots of other sectors that were hard hit by the pandemic, like travel and leisure, are also seeing more demand for their services and increasing their prices.

Most of the world’s central banks, including the Bank of England, suggest higher inflation is going to be temporary, and should naturally return to lower levels over time. But there are also suggestions that more job openings could lead to wage inflation. That, combined with record-high government spending, could mean inflation stays with us for longer than many expect.

Inflation can be good for stock markets – it normally means the economy is growing, but too much of it can also cause issues. If it gets too high, central banks could be forced to raise interest rates. This tends to help bring it back down as it makes borrowing more expensive.

But it can also impact share prices. Interest rates are used in the calculation to value shares, and a higher interest rate usually means lower valuations.

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

How has the UK stock market performed?

Since our last review three months ago, the UK stock market’s risen 5.6%. It didn’t do quite as well as some other European stock markets, and the broader global stock market.

Large and medium-sized companies posted solid gains of 5.7% and 4.7% respectively, but smaller companies led the charge, rising 9.0%. Remember, past performance isn’t a guide to future returns and smaller companies are higher risk than their larger counterparts.

Over the past year to the end of June, the UK stock market rose 21.5%. The basic materials sector was the strongest performer, followed by industrials, consumer services and financials. The weakest sectors were healthcare, utilities and consumer goods, although all major UK sectors made money.

What has the research team been up to?

We’ve held video calls with several UK-focused fund managers in recent months, including Ben Whitmore, manager of the Jupiter Income fund.

He invests in companies overlooked and undervalued by other investors, but with the potential to return to favour. His value-focused investment style has been unpopular with investors and performance has struggled over the past few years, though there’s been a resurgence in recent months.

The manager recently added to his investment in pharmaceutical firm GlaxoSmithKline. The firm’s new chief executive aims to place renewed focus on its research and development pipeline. The manager believes this could boost the share price in the long term.

We also met Henry Lowson and Henry Burrell, managers of the Royal London UK Smaller Companies fund. Meeting company management is at the heart of their approach – they meet over 400 a year. The companies they invest in share a number of characteristics, including a scalable business model, an innovative culture and barriers to entry from competition.

We also caught up with Konstantins Golovnovs and Jason Forster, who are part of the team that manages the Legal & General UK 100 Index Trust and Legal & General UK Mid Cap Index. The funds aim to track the FTSE 100 and the FTSE 250 (excluding investment trusts) respectively.

Legal & General has been running index tracker funds longer than most, with a record spanning more than 30 years. It's one of the largest providers of tracker funds and is home to the biggest index tracker team in the UK. That means it's got the resources and expertise to track indices as closely as possible, and the scale to keep charges to a minimum.

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.

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.

For more details on each fund and its risks, please see the links to their factsheets and key investor information below. Remember past performance is not a guide to the future. Investments and any income they produce can fall as well as rise in value, so you could get back less than you put in.

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 poorly during the onset of the pandemic. It’s recovered strongly since then, demonstrating the benefits of having a diversified portfolio.

In contrast, Unicorn Oustanding British Companies was a weaker performer, despite delivering a return of 14.9%* 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.

Annual percentage growth Jun 16 - Jun 17 Jun 17 - Jun 18 Jun 18 - Jun 19 Jun 19 - Jun 20 Jun 20 - Jun 21
Fidelity Special Situations 30.6% 8.2% -2.8% -19.6% 36.0%
Unicorn Oustanding British Companies 14.5% 12.5% -0.3% -10.1% 14.9%
FTSE All-Share 18.1% 9.0% 0.6% -13.0% 21.5%
IA UK All Companies 22.6% 9.2% -2.1% -11.1% 27.5%

Past performance is not a guide to the future. Source: *Lipper IM, to 30/06/2021.





UK Equity Income

The best performing UK Equity Income fund on the Wealth Shortlist was Jupiter Income. Manager Ben Whitmore’s value-style approach returned to favour in recent months, boosting the fund’s performance.

Strong performers included home improvement company Kingfisher, which owns brands like B&Q, Screwfix and Tradepoint. The company’s profits rose significantly as worldwide lockdowns resulted in a DIY boom.

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, it invests less in companies that rely more on the health of the economy to do well, so 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.

Troy Trojan Income currently holds shares in Hargreaves Lansdown plc.

Annual percentage growth Jun 16 - Jun 17 Jun 17 - Jun 18 Jun 18 - Jun 19 Jun 19 - Jun 20 Jun 20 - Jun 21
Jupiter Income 20.2% 7.6% -4.8% -20.6% 28.8%
Troy Trojan Income 11.4% 1.4% 4.2% -5.6% 8.2%
FTSE All-Share 18.1% 9.0% 0.6% -13.0% 21.5%
IA UK Equity Income 19.4% 6.2% -2.7% -13.6% 25.5%

Past performance is not a guide to the future. Source: *Lipper IM, to 30/06/2021.





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 over the year. But despite rising 62.7%*, it still underperformed the broader market of UK smaller companies by 2.5%. The team behind this fund has added a significant amount of value for investors over the long term though. Remember, past performance isn’t a guide to the future.

Franklin UK Mid-Cap was the weakest performer. 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 Jun 16 - Jun 17 Jun 17 - Jun 18 Jun 18 - Jun 19 Jun 19 - Jun 20 Jun 20 - Jun 21
Marlborough UK Micro-Cap Growth 43.6% 17.5% -3.7% -0.8% 62.7%
Franklin UK Mid-Cap 29.4% 16.4% -1.0% -10.9% 30.4%
FTSE Small Cap (excluding investment trusts) 28.4% 6.4% -8.6% -12.3% 65.2%
IA UK Smaller Companies 36.2% 17.1% -6.0% -5.6% 53.3%
FTSE 250 (excluding Investment trusts) 21.5% 11.2% -5.9% -13.3% 36.7%

Past performance is not a guide to the future. Source: *Lipper IM, to 30/06/2021.





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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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