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UK stock market and funds review – will Omicron hinder the recovery?

We look at what’s happened in the UK economy, how the stock market’s been 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.

The final three months of 2021 saw what many had feared – a new variant of Covid-19.

The Omicron variant was first detected in South Africa in November and since then has spread to over 130 countries. Recent studies suggest the new variant is more transmissible, but less deadly, than previous strains. 

Faced with the threat of the number of Omicron cases doubling every two to three days, the government implemented ‘Plan B’. This made NHS Covid-19 passes mandatory in certain places, encouraged people to work from home where possible and made face masks compulsory in most indoor venues.

What’s happening in the economy?

The Plan B measures brought England into line with Wales, Scotland and Northern Ireland, who already had similar rules in place. They’re much less stringent than the national lockdowns implemented in 2020 and 2021, so should have a more limited impact on the economy. That said, a surge in Covid-19 cases – more than 2 million in a single week in December – left lots of businesses short staffed, and unable to operate at full capacity.

The UK economy is also facing higher inflation. The Consumer Prices Index (CPI) measure of inflation rose 5.1% in the 12 months to November 2021. That's one of the largest increases in the last 20 years. 

The main lever the Bank of England (BoE) 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. In December, the BoE took the decision to raise rates from the historic low of 0.1% to 0.25%. This made the UK the first major economy to raise interest rates since the onset of the pandemic.

More interest rate rises are expected in 2022 as the BoE aims to keep a lid on inflation. However it has a difficult balance to strike. Raising rates too quickly could see the economy go into reverse, but the BoE 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 rose 4.20%, although it underperformed most other European stock markets. 

Large companies were the top performers, followed by medium-sized companies and higher risk smaller ones, which made a small positive return. Remember, past performance isn’t a guide to the future.

Over the year to the end of December, the UK stock market rose 18.32% and all major UK sectors made money. Oil & gas was the best performing major sector in 2021, having been the weakest performer in 2020. Life returning to normal has boosted demand for oil globally, and the oil price has risen significantly. The utilities, industrials and basic materials sectors also delivered strong returns. Telecoms, consumer services and consumer goods were among the weaker performers. 

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

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.

What’s the research team been up to?

We’ve held video calls with several UK-focused fund managers in recent months, including Richard Penny, manager of the TM CRUX UK Special Situations fund. He tries to invest in companies that are worth more than he’s being asked to pay for them. This is often because other investors are undervaluing the company’s potential for improvement or overlooking an opportunity available to the company.

Penny recently invested in eyewear frame and lens business Inspecs. He thinks the company has several tailwinds, including increased demand from emerging markets, the popularity of sunglasses and our ageing population. The company recently acquired a German competitor which Penny thinks presents significant opportunity for cost savings.

FIND OUT MORE ABOUT TM CRUX UK SPECIAL SITUATIONS, INCLUDING CHARGES 

TM CRUX UK SPECIAL SITUATIONS KEY INVESTOR INFORMATION 

Following news that Majedie would be acquired by Liontrust Asset Management, we also met James de Uphaugh, Chief Investment Officer of Majedie Asset Management and manager of the LF Majedie UK Equity fund. We were pleased to hear that the Majedie investment team will continue to be led by de Uphaugh in his new role as Head of the Global Fundamental team within Liontrust. It’s also positive that staff are incentivised to remain within the business.

Investors should note the LF Majedie UK Equity fund holds shares in Hargreaves Lansdown Plc.

LIONTRUST TO ACQUIRE MAJEDIE ASSET MANAGEMENT 

FIND OUT MORE ABOUT LF MAJEDIE UK EQUITY, INCLUDING CHARGES 

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

In contrast, AXA WF Framlington UK was a weaker performer. Manager Chris St John looks for themes that are likely to drive stock market growth over the long term and thinks about how they could change consumer behaviour. He then invests in companies set to benefit. Weaker performers within the fund included online fashion retailer Boohoo. The company recently downgraded its profit forecasts because of lower consumer demand and higher costs. 

Annual percentage growth

Dec 16 to Dec 17 Dec 17 to Dec 18 Dec 18 to Dec 19 Dec 19 to Dec 20 Dec 20 to Dec 21
Fidelity Special Situations 15.36% -13.50% 21.69% -11.99% 23.70%
AXA WF Framlington UK 18.13% -12.43% 30.14% -3.85% 14.71%
FTSE All-Share 13.10% -9.47% 19.17% -9.82% 18.32%
IA UK All Companies 14.08% -11.18% 22.50% -6.22% 17.12%

Past performance isn’t a guide to the future. Source: Lipper IM, to 31/12/2021.

FIND OUT MORE ABOUT FIDELITY SPECIAL SITUATIONS, INCLUDING CHARGES 

FIDELITY SPECIAL SITUATIONS KEY INVESTOR INFORMATION 

FIND OUT MORE ABOUT AXA WF FRAMLINGTON UK, INCLUDING CHARGES 

AXA WF FRAMLINGTON UK KEY INVESTOR INFORMATION 

UK Equity Income

The strongest performer in the UK Equity Income sector of the Wealth Shortlist over the past year was the IFSL Marlborough Multi Cap Income fund.

Unlike most other UK Equity Income funds, this one focuses on dividend-paying small and medium-sized businesses. Smaller companies outperformed their larger peers over the past year, and this boosted performance, although smaller companies are higher risk. We think the fund’s differentiated approach could make it a good diversifier within a broader income focused portfolio.

Aviva Investors UK Listed Equity Income was a weaker performer. Our analysis suggests the managers’ stock picking held back returns. No fund performs well at all times though, and we continue to rate managers Chris Murphy and James Balfour highly.

Annual percentage growth

Dec 16 to Dec 17 Dec 17 to Dec 18 Dec 18 to Dec 19 Dec 19 to Dec 20 Dec 20 to Dec 21
IFSL Marlborough Multi Cap Income 18.85% -13.60% 26.76% -12.44% 21.49%
Aviva Investors UK Listed Equity Income 12.23% -10.77% 22.90% -6.20% 15.53%
FTSE All-Share 13.10% -9.47% 19.17% -9.82% 18.32%
IA UK Equity Income 11.39% -10.50% 19.90% -10.79% 18.39%

Past performance isn’t a guide to the future. Source: Lipper IM, to 31/12/2021.

FIND OUT MORE ABOUT IFSL MARLBOROUGH MULTI CAP INCOME, INCLUDING CHARGES 

IFSL MARLBOROUGH MULTI CAP INCOME KEY INVESTOR INFORMATION 

FIND OUT MORE ABOUT AVIVA INVESTORS UK LISTED EQUITY INCOME, INCLUDING CHARGES 

AVIVA INVESTORS UK LISTED EQUITY INCOME KEY INVESTOR INFORMATION 

UK Small and Mid-sized Companies

FTF Franklin UK Mid Cap was the top performer in the small and mid-sized companies sector of the Wealth Shortlist over the past year.

The fund’s top performers included watch retailer Watches of Switzerland. It performed well as customers snapped up luxury timepieces online with money stored up during pandemic-induced lockdowns.

Our analysis suggests Paul Spencer has added a significant amount of value over the long term. This has been through his ability to select companies that have gone on to perform well, regardless of what sector they’re in.

TB Amati UK Smaller Companies had a weaker year in 2021 following several years of strong performance in comparison to the broader market of UK smaller companies. We still think the fund has the potential to do well over the long term, although there are no guarantees.

Annual percentage growth

Dec 16 to Dec 17 Dec 17 to Dec 18 Dec 18 to Dec 19 Dec 19 to Dec 20 Dec 20 to Dec 21
FTF Franklin UK Mid Cap 26.68% -13.29% 42.60% -14.02% 19.30%
FTSE 250 17.78% -13.25% 28.88% -4.55% 16.90%
TB Amati UK Smaller Companies 36.23% -6.31% 30.35% 8.85% 13.13%
FTSE Small Cap 18.15% -9.52% 18.82% 7.15% 23.04%

Past performance isn’t a guide to the future. Source: Lipper IM, to 31/12/2021.

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

FTF FRANKLIN UK MID CAP KEY INVESTOR INFORMATION 

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

TB AMATI UK SMALLER COMPANIES KEY INVESTOR INFORMATION

What did you think of this article?

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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