Fund Briefing: Is now the right time to invest in UK companies?

Fund Briefing: Is now the right time to invest in UK companies?

With Brexit woes continuing, it is a challenging time for UK companies. But investment experts say that doesn’t mean you should neglect your UK funds

The ongoing Brexit negotiations, international trade tensions, waves of political uncertainty and mixed economic news have certainly made people extremely nervous.

This anxiety is perhaps one reason why £319 million was withdrawn from UK funds during November alone, according to the Investment Association (IA). It is a challenging time, agrees Ben Brettell, senior economist at Hargreaves Lansdown. “UK companies are also dealing with a significant Brexit headwind, with heightened levels of uncertainty putting business off investment and damaging consumer confidence.”

However, no one knows how Brexit will pan out and it could take many years before everything is finalised, so people can’t totally ignore the UK, argues Darius McDermott, managing director of Chelsea Financial Services. “There are bound to be some ups and downs along the way, but I think long-term investors should still consider buying – and definitely not selling – UK equity funds,” he says. “We have some world-class companies of all sizes and they should be able to prosper in
the future.”

In fact, now could actually be a good time to buy, he says.

“The asset class is very much unloved by overseas investors, so is actually reasonable value at the moment. I believe a lot of the bad Brexit news is already priced in,” he adds. It is also worth considering that many companies in the FTSE 100 are multinational, with around 70% of their revenues generated from overseas markets. This means they are more likely to be affected by global, rather than UK-centric, issues.

For investors wanting exposure to the UK stock market, there are three main Investment Association sectors to search for funds: UK All Companies, UK Smaller Companies and UK Equity Income sectors. Each has a different focus.

Funds in UK All Companies invest at least 80% of their assets in UK equities, which have a primary objective of achieving capital growth, while the UK Smaller Companies has at least 80% in firms forming the bottom 10% by market capitalisation. Meanwhile, funds in UK Equity Income invest at least 80% in UK equities, focusing on dividend-paying companies that are expected to pay a rising income over time. The sector you choose will depend on your outlook and investment goals.

“We actually prefer UK equity income at the moment as the stock market is yielding close to 4.8%, so even if price returns are zero, you are still getting a decent income return,” says Mr McDermott. This is because there are two ways of making money from investing in company shares: if they go up in value and if the companies pay out a dividend. Even if values are not rising, you still may get an income from dividends.

Whichever sector you prefer, there are certain qualities to look for in a fund manager. “They must have a clear process which they stick to, even when their style or asset class is out of favour,” he adds. “They need to be passionate about their work, pragmatic and be able to separate short-term noise from long-term prospects.”

Patrick Connolly, a chartered financial planner with Chase de Vere, suggests the best way to get broad access to the UK stock market is through low-cost, index tracker funds whose role is to mirror the performance of a particular index. “They have become popular with investors disillusioned with high charging actively managed funds that underperform,” he says. “A FTSE 100 or FTSE All-Share tracker is a good choice and the most experienced passive managers include HSBC, L&G, Fidelity and Vanguard.” He highlights the HSBC FTSE All-Share Index fund.

“The largest holdings in the fund will always be the companies with the highest market capitalisation listed in the UK and these currently include HSBC, Royal Dutch Shell, BP and British American Tobacco,” he adds.

Mr Connolly stresses there are many factors that move share prices, making it impossible for investors to recognise all of them, as well as the potential impact they may have on the performance of a company. “Rather than trying to understand all companies, the best approach for most people is to focus on having diversified exposure to the UK market, alongside exposure to overseas shares and other asset classes, such as fixed interest and property,” he adds.

Andy Parsons, head of investments and product proposition at The Share Centre, advises drip-feeding money into the stock market during volatile periods. “Adopting a ‘little and often’ approach is an achievable strategy that can help reduce exposure to volatility,” he suggests.

One to watch: Liontrust UK Smaller Companies

L-R: Matt Tonge, Anthony Cross, Julian Fosh and Victoria Stevens

This fund invests in UK smaller companies and seeks to identify those with a durable competitive advantage that will allow them to sustain a higher than average level of profitability for longer than expected.

Its 10 largest holdings include Craneware, which helps healthcare providers optimise their financial performance, and Gamma Communications, which delivers business telecom solutions and owns a voice, data and mobile network.

Other names include RWS Holdings, a leading name in translation services; PayPoint, which offers in store payment services; Iomart Group , a provider of cloud solutions; and Trifast, which is involved in the manufacture and distribution of industrial fastenings.

Around 70% of the fund is invested in stocks on the FTSE AIM index, the successful growth market for flourishing firms that was launched in 1995. It is particularly known for helping smaller and growing companies raise the capital needed for expansion.

Just over 13% of the fund’s assets hail from the FTSE Small Cap (ex IT) index, while there is also representation from FTSE Fledgling Index and the FTSE 250.

This fund is favoured by Darius McDermott, managing director of Chelsea Financial Services, who points out it is managed by the same successful team behind the Liontrust Special Situations portfolio. “This fund employs the same investment strategy but with a small-cap bias,” he explains. “The managers focus on firms with strong positions within their industries and the fund has a great track record.”

Fund: Liontrust UK Smaller Companies
Managers Anthony Cross, Julian Fosh, Victoria Stevens & Matt Tonge
Launch date 08-Jan-98
Total fund size £856.4 million
Minimum initial investment £1,000
Min top-up investment £1,000
Initial  charge Up to 5% on the retail share class
Ongoing charge 1.65%
Annual management fee 1.5% a year
Contact details for retail investors 020 7412 1777

ROB GRIFFIN writes for the Independent, Sunday Telegraph and Daily Express.

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