Perhaps it is the ongoing woes and depressed sentiment towards China, market Jitters before tomorrow’s US rate rise decision or just investors cashing in stocks to buy Christmas presents, but whatever cause the symptom is the same.
The FTSE 100 has been haemorrhaging its recovery in the past few weeks and is currently not far from a 10 per cent fall since the beginning of December.
Performance of index since 2 December 2015
Source: FE Analytics
This means it has lost most of its post Black Monday recovery with the index only just in positive territory since 24 August.
The direction of travel from here is far from certain with many risks (both secular and cyclical) apparent. However, the FTSE 100 (at the time of writing) is now trading below the 6,000 level thanks to the huge falls in commodity related companies, such as mining and oil stocks, which make up large chunks of the index.
As a result, many investors may be looking to increase their exposure to the UK on the back of this sell-off.
For those who think the falls have now been overdone, in this article we take a look at three ways to capture a recovery looking at open-ended funds, investment trusts and tracker funds.
Funds
First up we take at two open-ended funds that could be the beneficiary of a UK recovery due to their respective managers’ focus on battered large cap stocks, which have suffered more than mid or small caps during the recent market weakness: the Schroder Income and Investec UK Special Situations funds.
The £1.37bn Schroder Income fund is the sister portfolio to the Schroder Recovery fund.
Both are managed along similar lines – but of course this has an income tilt - by FE Alpha Managers Nick Kirrage and Kevin Murphy although the former was launched in 2010, the latter was taken over by the pair in 2006.
The pair have a strong value tilt that has seen the fill their portfolios with the likes of GlaxoSmithKline, BP, HSBC and Barclays featuring in their top 10.
The £1bn Investec UK Special Situations, managed by Alastair Mundy since 2002, has a disciplined value/contrarian style with the manager specifically looking to buy stocks that are heavily out favour. In fact, he tends to own stocks which have fallen some 50 per cent since their share price peak.
Over longer term both portfolios are well regarded and have track records that beat both sector and the FTSE All Share.
However, performance has been a bit more disappointing of late for both Investec UK Special Situations and Schroder Income with the portfolios down against the FTSE All Share’s 0.67 per cent fall over one year.
According to FE Analytics, Schroder Income has been the better performer over five years with the fund ahead of the index and IA UK All Companies sector average while Investec UK Special Situations is ahead of the index but behind the sector average.
Performance of funds, sector and index over 5yrs
Source: FE Analytics
Investec UK Special Situations has a cheaper ongoing charges figure than Schroder Income: 0.85 per cent compared to 0.91 per cent. The latter has a current yield of 4.21 per cent thanks to its positioning.
Investment Trusts
The unique benefit of investment trusts is that they (occasionally) move to a sizeable discount to their net asset value when sentiment is low – meaning in addition to an improvement in the valuation of their underlying holdings you potentially get another boost from this discount narrowing or moving to a premium.
Two trusts that focus on large caps and have some of the widest current discounts are the £185m Invesco Income Growth Trust which is on a [8.1 per cent] and the £1.7bn Columbia Threadneedle UK Select Trust [7.3 per cent].
This means both trusts are trading on wider discounts than their one and three year averages.
The former is in the IT UK Equity Income sector with manager Ciaran Mallon mostly focusing on large caps. The latter, managed by Chris Kinder, has a majority of exposure to large caps but also has a reasonably strong weighting to mid and small caps.
Over the past five years both trusts are ahead of the index with Invesco Income Growth the better performer with a return of 68.29 per cent and Columbia Threadneedle UK Select Trust up 41.95 per cent. By comparison the FTSE All Share ex ITs index gained 26.56 per cent over the same period.
Performance of trusts and index over 5yrs
Source: FE Analytics
Despite their widening discounts, both trusts have also returned more than the index over one and three years.
Invesco Income Growth has an OCF of 0.99 per cent. Columbia Threadneedle UK Select is more expensive with an OCF of 1.73 per cent and a performance fee.
The former is geared 10 per cent and the latter less so at 3 per cent.
Trackers
Of course a simple and low cost way to buy into a potential recovery is buying going down the passive route as the large majority of active managers are underweight the likes of mining and oil which has been hurt the most this year and still makes up close to 15 per cent of the index.
The Vanguard FTSE U.K. All Share Index is one of the highest rated by FE’s Passive ratings in terms of how well it replicates the performance of the UK index.
FE data shows, for example, that the £4.1bn fund has had a tracking error of just 0.24 per cent and a tracking difference of just 0.93 percentage points since its launch in December 2009.
Of course, as mentioned it is the larger cap part of the market that has suffered the most and so investors trying to capture a snapback may wish to opt for a tracker such as the BlackRock 100 UK Equity Tracker, L&G UK 100 Index, HSBC FTSE 100 Index, Liontrust FTSE 100 Tracker or Santander Stockmarket 100 Tracker Growth.
The cheapest is the Vanguard FTSE U.K. All Share Index which charges an OCF of just 0.08 per cent while the cheapest of the FTSE 100 trackers is the L&G UK 100 Index which charges 0.1 per cent.
