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UK stock market and funds sector review – uncertainty reigns

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.

It’s often said that the only certainty is uncertainty, and that’s proven to be the case in recent months. Just as it looked like we were reaching a more stable footing after the pandemic, Russia invaded Ukraine.

The move received almost worldwide condemnation, and substantial sanctions have been imposed on Russia by the West.

The UK and US announced plans to terminate Russian oil imports this year. The EU committed to reducing dependence on Russian gas by two thirds over the same period. Just under half of the EU’s gas is currently supplied by Russia.

Russia is a large buyer of foreign manufactured foods, so lots of Western companies will also be harmed by the sanctions.

How’s the economy been impacted?

The most noticeable impact on the economy is inflation. Prices were already rising faster than we’ve seen in decades. But the war in Ukraine has added more pressure to supply chains that were already stretched by the pandemic. Inflation rose 7% in the 12 months to March.

Rising fuel costs have had a particularly damaging impact on households, as petrol and energy prices have risen substantially. The price of food and consumer goods has risen too, as companies have passed their own rising costs to customers. The recent rise in National Insurance compounded these concerns.

All this has fanned the flames of a cost of living crisis. People are being forced to tighten their belts, and this is already taking a toll on consumer spending.

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 how much we all spend. The BoE has already hiked interest rates twice from their historic lows – once in December 2021 and again in March this year – and the base rate now stands at 0.75%.

The BoE is walking a tightrope though. Raise rates too fast and it risks exacerbating the already serious cost of living crisis as borrowers with variable rates could struggle to service their debts. But raise them too slowly and inflation could get completely out of control.

How has the UK stock market performed?

Despite the geo-political and economic concerns of recent months, the UK stock market rose 0.49% in the first three months of 2022. Large companies rose 2.88%, but medium-sized and higher-risk smaller companies, which have tended to be more volatile in times of uncertainty, lost money. Remember, past performance is not a guide to the future though.

Over the year to the end of March, the UK stock market rose 13.03%, and most major sectors made money.

Oil & gas was the best performing sector over the period. Life returning to more normality following the pandemic has boosted demand for oil globally. The ongoing conflict in Ukraine restricted supply of oil, causing the oil price to rise significantly.

The utilities, healthcare and basic materials sectors also did well over the year. The consumer services and technology sectors were the only ones to lose money.

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

What’s the research team been up to?

We recently added the Royal London UK Smaller Companies fund to the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential.

The fund focuses on high-quality UK smaller companies, available at attractive valuations. Henry Lowson, the fund’s lead manager, has spent his investing career focused on UK small and medium-sized companies and is supported on this fund by deputy manager Henry Burrell.

We hold Lowson in high regard and believe he’s a passionate, considered and highly experienced smaller companies investor. We think he has the potential to deliver attractive returns over the long term, although there are no guarantees.

Following a detailed review of the sector and several meetings with the managers, our conviction has grown. Lowson has built a good track record, supported by his stock-picking ability.

We also feel the managers’ interests are aligned with investors, based on their incentivisation and the fact they both have significant personal investments in the fund. We’re positive about the fund’s long-term prospects, but investors should note the fund’s investments in smaller companies add risk.

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.

WHY WE ADDED ROYAL LONDON UK SMALLER COMPANIES TO THE WEALTH SHORTLIST

FIND OUT MORE ABOUT ROYAL LONDON UK SMALLER COMPANIES, INCLUDING CHARGES

ROYAL LONDON UK SMALLER COMPANIES KEY INVESTOR INFORMATION

We’ve also held meetings with several other UK-focused fund managers in recent months, including Chris St John, manager of the AXA WF Framlington UK fund.

He believes higher-risk small and medium-sized UK companies are currently available at more attractive valuations than their larger peers. He thinks they also have significantly more growth potential.

Lots of the companies he invests in have recently released solid results, yet their share prices have fallen. The manager’s been adding to these investments at a lower share price. Furniture retailer Dunelm and engineering company Spirax-Sarco are a couple of examples.

Please note the AXA WF Framlington UK Fund is an offshore fund so investors may not be protected by the Financial Services Compensation Scheme.

FIND OUT MORE ABOUT AXA WF FRAMLINGTON UK, INCLUDING CHARGES

AXA WF FRAMLINGTON UK KEY INVESTOR INFORMATION

How have our Wealth Shortlist picks 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 you take a diversified approach. This means choosing a good mix of managers who have a variety of strengths, styles and areas of focus.

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 fund in the UK Growth sector of the Wealth Shortlist over the past year was the Legal & General UK 100 Index. 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 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 faced a variety of challenges, including global supply chain issues, greater competition, and louder calls for sustainability.

Annual percentage growth
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Mar 21 -
Mar 22
AXA WF Framlington UK 4.99 5.77 -16.30 35.71 2.11
Legal & General UK 100 Index 0.23 7.20 -18.73 22.83 15.78
FTSE All-Share 1.25 6.36 -18.45 26.71 13.03
IA UK All Companies 2.76 2.89 -19.22 37.93 5.26

Past performance is not a guide to the future. Source: Lipper IM, to 31/03/2022.

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

LEGAL & GENERAL UK 100 INDEX 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 Artemis Income fund. Although it still underperformed the broader UK stock market and peers in the IA UK Equity Income sector.

Managers Adrian Frost, Nick Shenton and Andy Marsh look for businesses they believe can pay a stable and sustainable level of income, regardless of the health of the economy. Although nothing is guaranteed.

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 still rate managers Chris Murphy and James Balfour highly.

Annual percentage growth
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Mar 21 -
Mar 22
Artemis Income 4.70 3.02 -16.23 32.91 10.28
Aviva Investors UK Listed Equity Income 1.32 3.68 -19.30 37.04 7.83
FTSE All-Share 1.25 6.36 -18.45 26.71 13.03
IA UK Equity Income 0.38 3.45 -20.75 32.67 10.87

Past performance is not a guide to the future. Source: Lipper IM, to 31/03/2022.

FIND OUT MORE ABOUT ARTEMIS INCOME, INCLUDING CHARGES

ARTEMIS 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

Of the Wealth Shortlist funds in this sector, HSBC FTSE 250 Index was the strongest performer, although it still lost a small amount of money.

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.

TB Amati UK Smaller Companies had a weaker year following several years of strong performance compared 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
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
Mar 21 -
Mar 22
HSBC FTSE 250 Index 5.46 0.23 -17.13 44.30 -0.03
FTSE 250 5.64 -0.86 -21.23 47.54 -0.55
TB Amati UK Smaller Companies 23.41 3.32 -17.15 72.70 -8.17
FTSE Small Cap 2.21 -3.09 -24.37 74.91 5.50

Past performance is not a guide to the future. Source: Lipper IM, to 31/03/2022.

FIND OUT MORE ABOUT HSBC FTSE 250 INDEX, INCLUDING CHARGES

HSBC FTSE 250 INDEX KEY INVESTOR INFORMATION

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

TB AMATI UK SMALLER COMPANIES KEY INVESTOR INFORMATION

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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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