UK stock market and funds sector review – the curtain comes down on a chaotic year

The closing of the final quarter of any year always marks a natural point of reflection. Russia’s invasion of Ukraine and a cost-of-living crisis fuelled by double-digit inflation dominated headlines in 2022. This posed plenty of challenges for consumers and businesses alike in the UK.

This was compounded by the merry-go-round of prime ministers, and in particular by the short-dated premiership of Liz Truss. Her government will be remembered for its failed mini-budget which crashed the pound and forced the Bank of England (BoE) to step in to help maintain financial stability.

For all the uncertainty we had, there is one thing for certain – for most investors, 2022 won’t be missed.

However, despite all of this, the UK stock market did deliver a marginally positive 0.34% return.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

The squeezed consumer

The real income of most consumers, which takes into account the eroding effect of inflation, has been squeezed, forcing them to cut back and prioritise.

Even with government support measures for things like energy, the rising cost of living has resulted in people having less money in their pockets for the nice-to-haves, as the essentials take priority.

Forecasts show high inflation will erode average real pay and cut living standards by 7% over the two years to the end of March 2024 – wiping out the previous eight years of growth. This is likely to tip the UK economy into recession in the coming months if we’re not already in one.

Many leading economists expect higher inflation to linger for longer in the UK compared to other markets. If this is the case, then it could worsen the pressures on our budgets. This is also made worse by the higher cost of borrowing that comes with the rise in interest rates.

What’s the economic outlook?

The UK economy shrank by 0.3% in the three months to September 2022. This means consumers are spending less and businesses are cutting back on investing for the future.

While we await the figures for the final quarter, which are likely to tell a similar story, the Office of Budget Responsibility (OBR) estimates the UK economy will shrink by 1.4% in 2023.

In a typical recession, companies can be expected to make less profit, pay often falls and unemployment rises. Altogether, this means the government then receives less money in tax to use on public services.

It’s likely we’ll continue to see interest rate rises from the BoE in 2023. Many feel inflation will begin to fall this year, but when and by how much is difficult to predict. While inflation remains higher than the official 2% target, the bank will remain under pressure to show it’s serious about pushing this figure down.

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.

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 – it returned 5.18%*. 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 the weakest performer of our Wealth Shortlist selections in this sector – returning -17.90%. 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.

This has been a difficult year for the fund. However, we’re encouraged that the manager is staying true to his investment process. All fund managers endure periods of weaker returns, and we continue to have conviction in Chris St John as manager of the fund.

Past performance isn’t a guide to the future. Source: *Lipper IM, to 31/12/2022.

More about Legal & General UK 100 Index, including charges

Legal & General UK 100 Index Key Investor Information

More about AXA WF UK Equity, including charges

AXA WF UK Equity 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 – it returned 6.39%*.

Manager Ben Whitmore's value-style approach proved more robust in what was a difficult year for many UK Equity Income funds. We think this highlights the benefits of retaining a diversified portfolio.

The Troy Trojan Income fund was the weakest performer of our Wealth Shortlist selections in the UK Equity Income sector over the past year – returning -12.38%.

The fund has lagged the FTSE All Share index with style headwinds posing a challenging environment. We think Blake Hutchins continues to focus on following his investment process and his background and experience makes him well placed to navigate the fund through trickier times.

Past performance isn’t a guide to the future. Source: *Lipper IM, to 31/12/2022.

More about Jupiter Income, including charges

Jupiter Income Key Investor Information

More about Troy Trojan Income, including charges

Troy Trojan 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 fund, although it still fell by 17.38%*.

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 good growth potential at a low cost.

Royal London UK Smaller Companies had a difficult year, losing 30.88%. 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 isn’t a guide to the future. Source: *Lipper IM, to 31/12/2022.

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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