After a stellar 2022 for the UK’s FTSE All Share index relative to overseas markets, 2023 has seen it left behind so far. Japanese, American and European markets have all started stronger this year.
The obvious question is why the turnaround? One thing has dominated markets this year and that’s inflation.
Remember investments should always be made for the long term – we suggest at least five years. This article isn’t personal advice or a recommendation to invest. All investments can fall as well as rise in value – you could get back less than you invest. If you’re not sure an investment is right for you, please ask for advice.
The UK’s inflation problem
While other countries have had more success in getting inflation down faster, it’s been more persistent in the UK – although signs of it falling have started to show.
The UK has been suffering from a combination of energy related problems and a tight labour market. A rise in early retirements, long-term sickness and Brexit are also contributing to higher inflation than elsewhere.
Core inflation, which excludes energy, food, alcohol and tobacco has been particularly sticky. These excluded goods have volatile prices and tend to be influenced more by taxation than interest rates – so core inflation gives a good glimpse into how prices are changing in the wider economy.
In response, the Bank of England has raised interest rates on 13 consecutive occasions to reach the current 5% level.
However, the bigger than expected drop in annual inflation in the year to June has offered hope that interest rates might peak lower than previously thought. This helped make last week the best one for the FTSE All Share index since the opening week of 2023*.
Under owned and undervalued?
We still think the UK market is under owned and undervalued compared to other major markets. Most sectors of our domestic market are valued below historical averages. Valuations are particularly low among smaller companies which have been hit hard by the rate rising cycle.
Despite the attractive valuations, investors have continued to take their money out of the UK market. Even a better year of performance compared to international peers through a volatile 2022 wasn’t enough to stem the tide.
The UK All Companies sector proved unpopular with retail investors, finishing last year as the worst selling Investment Association (IA) sector. This isn’t anything new either – a UK equity sector has been the least popular with investors in seven of the last ten years (covering 2013 – 2022).
So why invest in the UK?
The UK has long had a good reputation for investment, built on its effective regulatory framework, its respect for the rule of law and its focus on shareholder value.
One aspect of this shareholder value is the record of attractive dividends paid by UK companies to investors, with yields having historically exceeded those of other developed markets. Larger companies in the UK have long been a great hunting ground for income. Lots of businesses boast impressive records of growing dividends to investors over the long term. But remember, dividends are not guaranteed and the past isn’t an indicator of future income.
But we think there’s plenty of capital growth potential from here too. The UK is home to a wide variety of companies. This ranges from international giants selling their products and services across the globe to a diverse array of exciting smaller businesses. Schroders estimate that UK shares are currently trading around 30% cheaper than global shares – a valuation gap not seen for 30 years.
We think there are some talented UK fund managers on our Wealth Shortlist with long-term performance potential and have included a selection below.
The Wealth Shortlist is designed to help investors build and maintain their own balanced and diversified portfolios.
3 'Best of British' fund ideas
Investing in these funds isn’t right for everyone. You 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.
Fidelity Special Situations
This fund aims to grow investors’ money over the long term. Manager Alex Wright employs a contrarian investment approach and invests in unloved large, medium-sized and higher-risk smaller companies. Wright has over 20 years investment experience and is supported by a large, well-resourced team of investment professionals at Fidelity. While investment styles go in and out of favour, we like that Wright has never deviated from his longstanding investment approach. The manager has the flexibility to invest in derivatives which, if used, can add risk.
Annual Performance Growth
| June 18 – June 19 | June 19 – June 20 | June 20 – June 21 | June 21 – June 22 | June 22 – June 23 | |
|---|---|---|---|---|---|
| Fidelity Special Situations | -2.85% | -19.58% | 36.00% | -1.51% | 5.72% |
| FTSE All Share | 0.57% | -12.99% | 21.45% | 1.64% | 7.89% |
Past performance is not a guide to the future. *Source: Lipper IM, to 30/06/2023.
Find out more about Fidelity Special Situations including charges
Fidelity Special Situations Key Investor Information
FTF Martin Currie UK Mid Cap
Manager Richard Bullas specialises in investing in medium-sized UK businesses, often considered to be the ‘sweet spot’ between growth potential and maturity. He aims to deliver income and capital growth over the longer term by investing in quality companies trading at attractive valuations. This fund invests in a relatively small number of companies, including some smaller companies both of which adds risk. We think Bullas has the experience, skill and team support to deliver good long-term returns.
Annual Performance Growth
| June 18 – June 19 | June 19 – June 20 | June 20 – June 21 | June 21 – June 22 | June 22 – June 23 | |
|---|---|---|---|---|---|
| FTF Martin Currie UK Mid Cap | -1.01% | -10.92% | 30.40% | -18.06% | 4.33% |
| FTSE 250 ex ITs | -5.85% | -13.32% | 36.71% | -16.10% | 2.95% |
Past performance is not a guide to the future. Source: Lipper IM, to 30/06/2023.
Find out more about about FTF Martin Currie UK Mid Cap, including charges
FTF Martin Currie UK Mid Cap Key Investor Information
Royal London UK Smaller Companies
Lead manager Henry Lowson has spent his entire investing career focused on analysing UK small and medium-sized companies. He and deputy manager Henry Burrell aim to deliver long-term growth by investing in some of the smallest companies in the UK stock market with plenty of growth potential, though this adds risk. We think the managers are well placed to pick out hidden gems in this under researched area of the market.
Annual Performance Growth
| June 18 – June 19 | June 19 – June 20 | June 20 – June 21 | June 21 – June 22 | June 22 – June 23 | |
|---|---|---|---|---|---|
| Royal London UK Smaller Companies | -3.18% | 0.22% | 49.42% | -25.63% | -6.75% |
| FTSE Small Cap ex ITs | -8.63% | -12.29% | 65.20% | -14.64% | -0.35% |
Past performance is not a guide to the future. Source: Lipper IM, to 30/06/2023.
Find out 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.