UK equity funds have sustained deep outflows over the past five years, with many wealth managers determined to move away from the “home bias” in client portfolios, while private investors have often been concerned about the political and economic outlook.
Another reason for the relative lack of appetite for the home market has been composition, with the index dominated by companies in areas such as mining, oil and gas.
But Hollands noted the sector composition may now be a positive. He said: “We are now in a very different environment of high inflation and rising interest rates, which is much less favourable to growth stocks and these have taken quite a beating since the start of the year – as evidenced by the Nasdaq’s fall. What was seen as the Achilles heel of the UK market – a mere 2.4 per cent exposure to tech – is now playing in its favour.
"Energy and material prices have risen sharply since the start of the year and financial stocks – banks in particular – tend to do better than most sectors when rates are on the up. These are sectors that are well represented in the UK equity market. With inflation likely to remain a key concern for some time yet – and even talk of stagflation (a toxic combination of high inflation and stagnant growth) – the composition of the UK market does suggest it should be more resilient to such an environment.
"Share valuations in the UK are also less stretched than they are in other developed markets, which, alongside its typically strong dividend payouts, offers a degree of comfort."
What was seen as the Achilles heel of the UK market – a mere 2.4 per cent exposure to tech – is now playing in its favourJason HollandsTurning to the funds Hollands said are best placed to take advantage of the prevailing market conditions, he commented: "The Artemis UK Select fund has an unconstrained, high conviction approach targeting undervalued growth companies and it has delivered a great track record under manager Ed Legget. Nearly 34 per cent of this fund is held in financials, with Barclays its biggest holding in the banking sector at 4.6 per cent, as well as smaller holdings in Natwest (1.5 per cent) and Virgin Money (1.2 per cent) and Standard Chartered (0.5 per cent)."
He continued: “Premier Miton UK Growth is managed by Jon Hudson and Benji Dawes. This fund targets long-term capital growth by investing in a mix of small, medium, and large-sized UK firms. The managers aim to create a portfolio of companies at various stages of development but they need to show persistently high returns on capital as well as other factors such as a strong management team. Hudson and Dawes also look for valuation markers, including free cash flow and a strong balance sheet.
"The portfolio has between 40 and 60 holdings with a bias towards the consumer discretionary and communication services sectors. Its investee companies include Warhammer-maker Games Workshop, Hikma Pharmaceuticals and Legal & General. The fund has historically outperformed the IA UK All Companies sector, powering forward when growth markets are in favour and holding up well when value is in vogue."
His final non-income pick is the very long-established Fidelity Special Situations fund. He said: “A key Bestinvest pick for UK equity exposure is the Fidelity Special Situations fund, which is 80 per cent invested in UK-listed companies but also includes some overseas holdings. It invests across the full gamut of the UK market with considerable exposure to smaller companies."
david.thorpe@ft.com
