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Funds for buying the best of British

31 January 2024

Artemis UK Select, Liontrust UK Growth and Montanaro UK Income are popular choices amongst fund selectors.

By Emma Wallis,

News editor

Analysts are more bullish on UK stocks than they have been in decades, according to new research by investment platform AJ Bell, which showed 59% of recommendations among FTSE 100 companies are buys, a figure which rises to 62% for FTSE 350 names.

This is the highest proportion in a decade and shows how optimistic experts are on the domestic market, which has spent years lagging behind its developed market peers.

Edward Allen, private client investment director at Tyndall Investment Management, said: “We are wholeheartedly overweight UK equities. There are multiple reasons for this, but the easiest one to hang our hat on is the price to earnings (P/E) ratio and its inverse, the earnings yield.

“Bloomberg has the earnings yield for a widely quoted all-cap UK index at 8.3% as of 31 December 2023, which compares to the S&P 500 at 4.4%, the Eurostoxx at 7.7% and Japan 6.2%. Were this UK earnings yield to revert to its 20-year average of 6.3%, UK equity indices would rise by circa 30%.”

Trustnet asked fund selectors and wealth managers to recommend funds for investors seeking to take advantage of these attractive valuations.


Funds for broad large-cap exposure

Daniel Lockyer, senior fund manager at Hawksmoor Fund Managers, and Paul Green, investment manager at Columbia Threadneedle Investments, both tipped Artemis UK Select.

FE fundinfo Alpha Manager Ed Legget and co-manager Ambrose Faulks invest mainly in large-caps, which would benefit if institutional investors returned to the UK equity market, Lockyer said.

“The fund trades on 8.4x P/E ratio compared to 10.8x for the UK market, which is a function of a number of factors, including a high allocation to UK banks such as Barclays and HSBC that trade at a huge discount to their global peers purely because they are listed in the UK,” Lockyer explained.

Green added: “The fund is often categorised as value but the reality is more nuanced than that. The managers are looking to buy mispriced company cashflows which they believe have the potential to grow. They then use their judgement on how the value of these cashflows can re-rate in the future; this can be via a specific catalyst or even just taking a longer-term view than consensus.”

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics

Laith Khalaf, head of investment analysis at AJ Bell, said active managers often gravitate towards smaller companies, so the most straightforward way to invest in UK blue chips would be to buy a FTSE 100 tracker from a trusted passive provider, such as the iShares UK Equity Index fund, while EQ Investors communications director Ben Faulkner highlighted Amundi MSCI UK IMI SRI PAB UCITS ETF as an option for those concerned about environmental, social and governance (ESG) factors.


Value plays

Although the UK market as a whole is cheap, some might wish to double down and buy out-of-favour names in the already unloved market. Here, Columbia Threadneedle holds Premier Miton UK Value Opportunities. “Manager Matt Tillett has a contrarian mindset and seeks to exploit equity mispricing via market, economic or industry cycles,” Green said.

“He has a focus on absolute value, which means he looks to identify a margin of safety to help protect against downside risks. He takes a multi-cap, benchmark agnostic approach and is currently seeing lots of opportunity further down the market-cap spectrum.”

Khalaf suggested Fidelity Special Values led by FE fundinfo Alpha Manager Alex Wright, who is an “experienced, contrarian investor, looking for unloved or overlooked companies that are set to stage a recovery”.

“This can be a higher risk approach, but the fund is well diversified with around 100 holdings and provides investors exposure across the market-cap spectrum,” he explained.

Performance of fund and trust vs benchmark over 5yrs

Source: FE Analytics


Going for growth

Alternatively, growth investors who have made money from the US could look closer to home to find cheaper alternatives.

For this approach, Tom Stevenson, investment director at Fidelity International, and Khalaf are both fans of Liontrust UK Growth.

Stevenson said: “Liontrust looks for quality, seeking out companies with a competitive advantage that will enable them to grow profits at an above average rate for longer than expected.”

Khalaf added: “The fund benefits from a management team with a clear philosophy and process that have been tried and tested over time under the long-term leadership of Anthony Cross and Julian Fosh. The longevity of the team and consistency of implementation provides credibility, with a strong focus on long-term sustainability of company profits.”

Performance of fund vs sector and benchmark over 5yrs

Source: FE Analytics


Income strategies

The UK market is renowned for its dividends, with domestic stocks keen to reward shareholders. Ian Rees, co-head of multi manager funds at Premier Miton Investors, put forward the Allianz UK Listed Equity Income fund, managed by Richard Knight and Simon Gergel, as an option to gain income through share payouts.

“It is a multi-cap strategy that is finding a plentiful supply of valuation anomalies lower down the cap spectrum,” Rees said. “With a high active share, a yield premium to the market and an aggregate fund valuation that is lower, this provides the patient investor with an attractive yield while they await a recovery in the UK market.”

Meanwhile, Khalaf proposed the City of London investment trust, which currently offers a yield of 5%, and Man GLG Income on a yield of 5.4%.

“City of London benefits from having had Job Curtis at the helm since 1991, with a focus on dividend growth and quality, largely from the large-cap segment of the UK stock market. The trust is one of the Association of Investment Companies’ dividend heroes, having raised its income distribution since 1966.”

Man GLG Income is a value orientated income fund that has been led by Alpha Manager Henry Dixon for a decade. “The manager looks for undervalued companies with a focus on cash flows and an eye on generating income for investors,” Khalaf said.


Small-cap funds poised for a rebound

Although large-caps are cheap, even better value could be found lower down the market-cap spectrum, which has been hit even harder.

If this is the area that most interests investors, then Montanaro UK Income, a small and mid-cap fund managed by Guido Dacie-Lombardo, is a popular choice. Quilter and Columbia Threadneedle both hold the fund.

Quilter portfolio manager CJ Cowan said: “Although performance has been challenging over the past two years, the manager has shown the ability to add value over through an economic cycle by virtue of the repeatable investment process that focuses on high quality growth companies.”

Performance of fund vs sector over 5yrs

Source: FE Analytics

Columbia Threadneedle also invests in Gresham House UK Smaller Companies. “Ken Wotton and his team utilise a private equity approach to public market investing,” Green said. “They have a large network of industry contacts who they use to assist with due diligence as part of their fundamental, bottom-up approach. Their process has a quality bias, ruling out loss making businesses and those with stretched balance sheets.”

Performance of fund vs sector over 5yrs

Source: FE Analytics

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.