Chances still abound to bag UK plays

The Bank of England has held interest rates at record lows of 0.5 per cent for more than three years. In such a sluggish environment, yields and valuations on many UK assets have remained at historically depressed levels.

In spite of the short-term swings in financial markets, a range of investors maintain this represents a long-term opportunity to buy into a number of key UK asset classes.

According to Andrew Cole, manager of the Baring Multi-Asset fund, 2012 is looking more positive for equities, in spite of there being a number of potential strong headwinds. In March, his allocation to equities included more than 20 per cent in the UK.

He says: “In the long term, equities will perform well but one bad year can wipe out several good years of returns. By making significant changes to our asset allocation we seek to hold the right asset at the right time to produce good returns but also preserve capital in falling markets.”

James Millard, chief investment officer at Skandia Investment Group, echoes this view, suggesting that equities will go higher in 2012 in spite of already posting record performance in the first quarter. On a global basis, equities had their strongest quarter in more than 10 years on the back of strong economic data and hopes that the European debt crisis was past its worst point.

Within UK equities, Derek Mitchell, manager of the Royal London UK Mid Cap Growth and UK Opportunities funds, is seeing opportunities in a broad range of sectors. While Mr Mitchell remains defensively positioned with weightings biased towards consumer staples, telecoms and pharmaceuticals, he also favours certain industrial stocks that are well placed to take advantage of the current economic environment, as well as companies whose earnings are derived from important overseas markets.

Like his colleague Martin Cholwill, who runs the Royal London UK Equity Income fund, Mr Mitchell also recognises the contribution UK stocks can still make to their long-term returns by raising the income they offer in the form of dividends.

Where income is concerned, however, investors are overwhelmingly favouring a single asset class: bonds. According to the IMA, fixed income was the leading asset class for the seventh consecutive month with net retail sales of £660m in March. The average monthly sales of fixed income funds in the past 12 months was £465m. The first quarter of 2012 was the best for fixed income funds since the third quarter of 2010. In terms of returns, investors enjoyed a return of 13.5 per cent from UK bonds last year, the largest annual return from this asset class since 1998.

It is important to acknowledge the market has experienced some unusual conditions in the past three years which may not be repeated. The Bank of England in particular has bought up a third of the gilt market under its quantitative easing programme, which it started just after interest rates hit their record lows.