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BLOG: Why do we dislike the UK stock market?

Paloma Kubiak
Written By:
Paloma Kubiak

Despite being one of the best-performing stock markets in a dismal 2022, we Brits seem to have fallen out of love with our home market. In fact, we’ve withdrawn billions of pounds over the past year.

Soaring inflation, rising interest rates, a pretty stagnant economy, and ongoing concerns about the impact of Russia’s invasion of Ukraine have all weighed heavily on sentiment. The reluctance of investors is understandable given the diet of gloomy news.

So it’s been a rather strange six months for the FTSE 100. Despite hitting all-time highs in February, the financial uncertainty has slowed its progress. As I write at the tail end of June, the index is hovering around the 7,440 mark, comfortably below its position at the start of the year. Where it goes next is anyone’s guess.

However, not every company has been mired in misery. Just over half the members of the UK’s leading stock market index have seen their share prices increase over the past six months. And some have skyrocketed. Rolls Royce Holdings is up 70% and 3i Group has risen 41%, while retailer B&M and Flutter Entertainment have enjoyed uplifts of more than 30%.

At the other end of the table, mining company Fresnillo and Anglo American have both tumbled 30%, while Glencore and British American Tobacco are down more than a fifth.

Searching for opportunities

The conclusion is clear: There are still plenty of great opportunities to be found among UK-listed companies for fund managers who focus on stock picking. It’s also important to remember that relatively few businesses in the FTSE 100 are reliant on the UK consumer. The vast majority are multinational giants with global customer bases. While not immune to global problems – the war in Ukraine being a case in point – these large firms have more financial firepower to overcome potential hurdles.

The most popular sector for managers specialising in these stocks is IA UK All Companies, which is for funds investing at least 80% of their assets in UK equities. However, just because they share a home, doesn’t mean they’re all the same. The investment philosophies and processes of these various portfolios can vary enormously.

Some will focus their attention on established larger businesses, while others will concentrate on slightly smaller names that are growing more rapidly. That’s why it’s essential to do your homework before committing any money. You need to factor in the fund’s objective and its manager’s track record into your decision.

One who is definitely worth considering is Chris St John, who has clocked up many years of great performances at the helm of the AXA Framlington UK Mid Cap fund.

We like how he uses thematic long-term ideas to help construct a portfolio of dynamic growth companies that are most likely to benefit. As well as investing in FTSE 100 giants, the fund can also embrace smaller businesses, which gives St John plenty of scope to scour the entire market for the best ideas.

Of course, it’s not essential to invest in companies that are flying high. In fact, there are often more opportunities to be found among those that are struggling. The Schroder Recovery fund aims to deliver attractive capital growth by investing in businesses that have suffered a setback, but where long-term prospects look good.

We believe this fund, which is run by Andrew Lyddon and Kevin Murphy, can provide investors with exposure to an intriguing selection of stocks. This approach requires patience. The style does lead to shorter periods of underperformance, but the core discipline of buying cheap stocks has been successful over the longer-term.

Those wanting to invest in a mix of different sized companies could consider the Liontrust Special Situations fund, which is a ‘best ideas’ portfolio, encompassing any UK stocks regardless of size or sector. The managers have a distinctive investment process, which has been implemented with a high level of skill and consequently the fund has an impressive long-term track record.

And finally, some fund managers have a few extra tools at their disposal. For example, the CT UK Extended Alpha fund primarily invests in large UK companies – but with an added twist.

Not only can the manager generate returns by buying stocks expected to do well, but he can also make money on those predicted to do badly, known as ‘shorting’.

We see Chris Kinder as a very strong manager, with a robust and sensible process. In his most recent fund update, he emphasised that UK equities were trading at very attractive valuations.

“We will continue to focus on company fundamentals and use volatile markets to top up and buy favoured stocks to deliver solid, risk-adjusted returns,” he wrote.

Juliet Schooling Latter is research director at FundCalibre