UK stock market and funds review – we’re not out of the woods yet

The UK’s recovery from the Covid-19 pandemic continued in the three months to the end of September 2021.

While tens of thousands of people per day continue to contract the virus, hospitalisations and deaths have remained relatively low. That’s thanks to the UK’s vaccination success so far. For many, life has regained a sense of normality as most Covid-related regulations have been rolled back.

We’re not out of the woods yet though. The NHS will have a lot on its plate throughout the winter months. Alongside Covid-19, the health service faces other challenges, including normal winter illnesses like flu and a backlog of other patients waiting for treatment delayed by the pandemic. If the NHS looks likely to be overrun, the government could be forced to consider further restrictions.

What’s happening in the economy?

The UK’s economic recovery continued in recent months, although it hasn’t been plain sailing.

In July, the ‘pingdemic’ sent hundreds of thousands of workers a week into self-isolation. A shortage of staff left lots of businesses unable to meet demand, and this caused a drag on economic output. Output bounced back in August as the government loosened self-isolation rules.

The latest figures suggest output is still below pre-pandemic levels though and labour shortages could cause another drag in the short term. Job vacancies hit 1.1 million between July and September, the highest level since records began 20 years ago. It’s putting even more pressure on companies already struggling to cope with higher energy costs and supply chain problems.

Inflation is on the rise too. The most recent figures show prices rose by an average of 3.1% over the past year, well above the Bank of England’s 2% target.

The main lever it has to bring inflation down is raising interest rates. This increases the cost of borrowing money, reduces disposable income and limits growth in consumer spending. The Bank has a difficult balance to strike though. Raising interest rates too quickly could see the economy go into reverse, but the Bank could risk losing credibility if prices keep accelerating.

How has the UK stock market performed?

Since our last review three months ago, the UK stock market’s risen 2.2%*, putting it ahead of most other European markets, but slightly behind the US market.

Medium-sized companies were the top performers, rising 4.3%*, but large and small companies also posted respectable gains of 2.0%* and 2.7%* respectively. Remember, past performance isn’t a guide to future returns.

Over the past year to the end of September, the UK stock market rose 27.9%*. All major UK sectors made money, but some did better than others.

The oil & gas sector was the best performer. Life returning to normal has boosted demand for oil globally, and the oil price has risen significantly, recently surpassing $80 per barrel for the first time in three years. The basic materials and industrials sectors also delivered strong returns. Healthcare, consumer goods and technology were among the weaker performers.

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

What has the research team been up to?

We’ve held video calls with several UK-focused fund managers in recent months, including Richard Bullas and Marcus Tregoning, two of the four co-managers of the FTF Franklin UK Mid Cap fund. They’re currently finding plenty of opportunities in the industrials, consumer discretionary and real estate sectors, but less in consumer staples, oil & gas and healthcare.

Shortly after our call with the managers, it was announced that veteran research analyst, and longstanding co-manager, Mark Hall, would retire. Following the announcement, we met with the team again to discuss the implications of Hall’s retirement. While it’s disappointing to see such a successful analyst and fund manager leave, we believe the fund is still in good hands under lead manager Richard Bullas, who has been involved with the fund since 2013 and has a strong track record. As a result, the fund retains its place on the Wealth Shortlist. You can read our views in more detail by following the link below.

Read the latest FTF FRANKLIN UK MID CAP news

FIND OUT MORE ABOUT FTF FRANKLIN UK MID CAP, including CHARGES

View FTF FRANKLIN UK MID CAP KEY INVESTOR INFORMATION

We also took the decision to remove the Unicorn Outstanding British Companies fund from the Wealth Shortlist. This was following several months of engagement with the managers and other senior members from across the Unicorn business. You can read more about our decision to remove the fund by following the link below.

Read our WEALTH SHORTLIST UPDATe for UNICORN OUTSTANDING BRITISH COMPANIES

FIND OUT MORE ABOUT UNICORN OUTSTANDING BRITISH COMPANIES, including CHARGES

View UNICORN OUTSTANDING BRITICH COMPANIES 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.

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 isn’t 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, Legal & General UK 100 Index was a weaker performer, despite delivering a return of 24.4%*. The fund aims to track the performance of the FTSE 100 index – the largest 100 companies on the UK stock market. The fund’s managed by a large and experienced team that’s done a good job of performing similarly to the index over the long term.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM, to 30/09/2021.

FIND OUT MORE ABOUT FIDELITY SPECIAL SITUATIONS, including CHARGES

View FIDELITY SPECIAL SITUATIONS KEY INVESTOR INFORMATION

FIND OUT MORE ABOUT LEGAL & GENERAL UK 100 INDEX, including CHARGES

View LEGAL & GENERAL UK 100 INDEX KEY INVESTOR INFORMATION

UK Equity Income

The best performing UK Equity Income fund on the Wealth Shortlist over the past 12 months was Jupiter Income. Manager Ben Whitmore’s value-style approach returned to favour in recent months, boosting the fund’s performance.

Top performers for the fund included high street bank NatWest. The share price more than doubled over the past year, boosted by an announcement that the company would sell its Irish business to focus on the UK market.

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 better than lots of others during the initial coronavirus-related sell off. However, it invests less in companies that rely 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 still think this fund could form part of a well-diversified income portfolio.

Troy Trojan Income currently holds shares in Hargreaves Lansdown plc.

Annual percentage growth

Past performance is not a guide to the future. Source: Lipper IM, to 30/09/2021.

FIND OUT MORE ABOUT JUPITER INCOME, including CHARGES

View JUPITER INCOME KEY INVESTOR INFORMATION

FIND OUT MORE ABOUT Troy TROJAN INCOME, including CHARGES

View TROY TROJAN INCOME KEY INVESTOR INFORMATION

UK Small and Mid-sized Companies

TB Amati UK Smaller Companies was the best-performing fund in the UK Small and Mid-sized Companies sector of the Wealth Shortlist over the past year. Despite rising 42.8%*, it still underperformed the broader market of UK smaller companies. The managers’ long-term track record has been exceptional though, and we expect this fund to do well over the long term. Remember, past performance is no guide to the future.

HSBC FTSE 250 Index was the weakest performer. This fund fully replicates the FTSE 250 Index, meaning it invests in every company in the index, and in the same proportion. We think the fund is a good way to invest in a broad range of medium-sized companies with exciting growth potential at low cost.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM, to 30/09/2021.

Where no data is shown, figures are not available.

FIND OUT MORE ABOUT TB AMATI UK SMALLER COMPANIES, including CHARGES

View TB AMATI UK SMALLER COMPANIES KEY INVESTOR INFORMATION

FIND OUT MORE ABOUT HSBC FTSE 250 INDEX, including CHARGES

View HSBC FTSE 250 INDEX KEY INVESTOR INFORMATION