UK stock market and funds sector review – mini-budget adds to market turmoil in difficult quarter

The last quarter saw a Conservative leadership saga, ending this month with Rishi Sunak succeeding Liz Truss as prime minister of the UK. Truss’ tenure will be remembered for the negative reaction to September’s mini-budget, announced by now ex-chancellor Kwasi Kwarteng.

A series of measures aimed at boosting the prospects for economic growth were received badly by markets. Concerns over how the measures would be paid for saw the pound fall to a record low against the dollar. A sharp fall in bond prices forced the Bank of England (BoE) to step in to maintain financial stability.

Jeremy Hunt replaced Kwarteng as chancellor and as Rishi Sunak makes key appointments in the coming days, he’ll now hope to regain the confidence of his party, voters and the markets.

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

Where are we in the rate raising cycle?

All the turmoil we’ve seen in recent weeks has only added to a challenging economic environment for the UK.

After 30 years of relatively stable inflation, rising prices have come back with a vengeance. Rising energy costs, constrained food supplies and global supply chain disruptions pushed inflation to a 40-year high with prices in September 10.1% higher than a year earlier.

The BoE expects the rate of inflation to peak at 11% in October and then remain above 10% for a few months before starting to come down. Ratings agency Fitch expect the interest rate to rise as high as 5% by mid-2023.

Even with government support measures in some areas like energy, the rising cost of living will result in people having less money in their pockets for discretionary spending as the essentials take priority. This isn’t good news for more cyclical sectors of the economy – those with their fortunes tied to the health of the economy.

As consumption takes a hit, the economy gets smaller, businesses often make less profit, and the government receives fewer taxes. This can make it more difficult for the government to spend money on all its priorities, and more often than not, makes for some tough decisions.

How have our Wealth Shortlist funds performed?

Our Wealth Shortlist selections delivered mixed performance over the past year, although we usually expect this from what is a wide 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 you take a diversified approach. 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, and make sure any new investment forms part of a long-term diversified portfolio.

For more details on each fund and its risks, see the links to their factsheets and key investor information below.

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 fund in the UK Growth section of the Wealth Shortlist over the past year was the Legal & General UK 100 Index fund. Remember, this is over a very short time frame and past performance isn't a guide to future returns.

The fund aims to track the FTSE 100 – an index of the 100 largest companies listed on the UK stock market. The fund's focus on large companies, which outperformed their smaller peers, boosted performance.

AXA World Funds Framlington UK was a weaker performer. The manager’s focus on higher-risk small and medium-sized companies has hurt in an environment where large caps have outperformed. His growth-focused investment style has also been out of favour relative to value.

Chris St John is an experienced manager with a long track record who has demonstrated an ability to select companies with outstanding prospects. We’re confident the fund has the potential to do a good job for investors over the long term.

Past performance is not a guide to the future. Source: Lipper IM, to 30/09/2022.

More about Legal & General UK 100 Index, including charges

Legal & General UK 100 Index Key Investor Information

More about AXA World Funds Framlington UK, including charges

AXA World Funds Framlington UK Key Investor Information

UK Equity Income

The strongest performer in the UK Equity Income section of the Wealth Shortlist over the past year was the Jupiter Income fund. Manager Ben Whitmore's value-style approach proved more robust over the past year where many UK Equity Income funds lost money. We think this highlights the benefits of retaining a diversified portfolio.

IFSL Marlborough Multi Cap Income was a weaker performer. Unlike most other UK Equity Income funds, this one focuses on dividend-paying small and medium-sized businesses. Higher-risk smaller companies underperformed their larger peers over the past year, and this dragged on performance. Despite this, we still think the fund's differentiated approach could make it a good diversifier within a broader income-focused portfolio.

Past performance is not a guide to the future. Source: Lipper IM, to 30/09/2022.

More about Jupiter Income, including charges

Jupiter Income Key Investor Information

More about IFSL Marlborough Multi Cap Income, including charges

IFSL Marlborough Multi Cap Income Key Investor Information

UK Small & Mid-sized Companies

The strongest performer in the UK Small & Mid-sized section of the Wealth Shortlist over the past year was the HSBC FTSE 250 Index, although it still fell by 24.53%*. 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 a low cost.

Royal London UK Smaller Companies had a weaker year, losing 35.80%. Growth is the overarching style of the fund, which means the managers focus on companies with long-term earnings growth potential. This style has been out of favour over the period, holding back returns.

We think lead manager Henry Lowson is a passionate and experienced smaller companies investor with the potential to deliver attractive returns over the long term. Remember, there are no guarantees and smaller companies are higher risk than their larger counterparts.

Past performance is not a guide to the future. Source: *Lipper IM, to 30/09/2022.

More about HSBC FTSE 250 Index, including charges

HSBC FTSE 250 Index Key Investor Information

More about Royal London UK Smaller Companies, including charges

Royal London UK Smaller Companies Key Investor Information

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Our fund research is for investors who understand the risks of investing and that 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.