There is an enormous amount of pessimism directed towards UK equities at the moment, according to Hargreaves Lansdown’s Mark Dampier (pictured), who believes the fear has been unjustly fuelled by the media. 
At the same time, however, he warns it is foolish to assume that the pullback in last year’s growth/value rotation is temporary and that now is the time to throw caution to the wind.
As such, he believes investors should retain diversified exposure to UK equities through both value and quality-driven funds, although he particularly likes funds that invest further down the cap spectrum.
“The media is, generally speaking, pro-‘Remain’ and clients are influenced, to some degree, by a lot of the articles which are incredibly negative. But that’s just a negativity that has continued since 2008,” Dampier explained.
“I would suggest that, if you’d have kept sides with the media over the long term, you wouldn’t have invested anywhere and that negativity is enormous at this time.”
Following the sharp rotation from quality growth into value stocks during the second half of last year and the aggressive pullback year-to-date, the head of research believes this is a sign that the macro backdrop is simply “trundling along” and that these swings are entirely sentiment-driven.
“A long time ago after the financial crisis, I thought we would have what I call a ‘long middle’, which would probably entail sub-par GDP of no greater than 2 per cent,” he continued.
“Basically, I thought we wouldn’t see a peak of GDP greater than about 2 per cent and that it would oscillate between 1 and 2. Therefore, if the GDP fell to 1 it would almost feel like a recession and, to be honest with you, that’s pretty much what is happening now.”
He says the rotation was the result of widening valuations between quality and value as opposed to broader overarching drivers and, as such, was unsurprised to see a snapback.
Performance of indices over 1yr
Source: FE Analytics
“Whether that continues I don’t know, but it shows you why you shouldn’t have a portfolio facing one direction,” he added.
Despite the relative underperformance of value stocks year-to-date, for instance, the manager says it is prudent to hold some value exposure and to maintain a long-term investment time horizon.
One value-focused UK fund he particularly likes is the £3.1bn JOHCM UK Equity Income fund, which is headed up by Clive Beagles and James Lowen.
The fund, which currently has a portfolio of 61 stocks, aims to provide long-term capital appreciation and an above-average dividend yield which also increases over time.
It does so through only holding stocks which yield more than the FTSE All Share, which the managers say is indicative of healthy cash levels on balance sheets and bright future business prospects.
Over five years, the fund has returned 85.74 per cent compared to its sector average and benchmark’s respective returns of 69.63 and 56.71 per cent. Has an investor put £10,000 into this fund five years ago, they would have received £2,889.29 in income alone.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
“It’s quite a cyclical fund yet it has continued to do okay,” Dampier said. “It’s slightly underperformed year-to-date but only marginally. I hold it in my own portfolio.
“I would still hold that, but I hold Woodford and Train which are what you would probably call slightly more defensive. In a way, it’s a continuation of risk-on, risk-off and I don’t see that changing as of yet.”
Another UK value fund the research manager owns alongside quality growth-focused funds is M&G Recovery, which has been managed by Tom Dobell since the turn of the millennium.
Once a top performer, the fund underwent a period of underperformance between 2012 and the end of 2015, when it fell into the bottom decile with a return of 9.48 per cent compared to its average peer’s return of 53.25 per cent.
Over the last year, however, it has comfortably outperformed its sector average and benchmark with a top-decile total return of 26.75 per cent.
“I have taken a huge amount of stick for backing this fund but, actually in the last year or so, it’s done really well,” Dampier continued.
“It’s more a point of not having all of your eggs in one basket. It’s not just M&G Recovery, most of those value funds have picked up quite strongly.
“Since the beginning of the year UK mid-caps have risen; they’re up about 7 or 8 per cent while the FTSE 100 is pretty much flat. It just goes to show that guessing where markets will end up is foolish really. It is more about having the balance between various companies.”
Within the UK mid-cap space, the head of research particularly likes FE Alpha Manager Luke Kerr’s four crown-rated Old Mutual UK Dynamic Equity fund. The £501m fund aims to provide long-term capital appreciation through a portfolio of predominantly long positions outside of the FTSE 100, although it is also able to short.
Over five years, the fund has returned 163.84 per cent, outperforming its average peer and its FTSE 250 (ex IT) benchmark by 97.65 and 65.5 percentage points respectively.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Further down the cap spectrum, Dampier says Schroder UK Dynamic Smaller Companies is a well-run fund that is well-suited to long-term investors.
Run by FE Alpha Manager duo Paul Marriage and John Warren, the £549m fund has a concentrated portfolio of 63 stocks which are chosen using bottom-up stock selection focusing on growth potential and valuation discrepancies. Examples of its largest holdings include Fever-Tree, chemicals company Treatt and milk haulage logistics company Wincanton.
Over five years, the fund has outperformed its sector average by 43.62 and 24.52 percentage points respectively with a total return of 146.59 per cent.
“I’ve never been a fan of the top half of the FTSE 100 because it is so concentrated. Sadly, we don’t necessarily have that many great companies coming in at that sort of size,” Dampier said.
“But around the mid and small-caps, there are plenty of opportunities that fund managers find. Our view is that around mid- and small-cap is where you find the best managers and where we tend to concentrate most of our money, even though you might get a bit of volatility.
“They unearth opportunities and I think that people spend too much time studying macro and coming to the wrong conclusion.
“I look at the amount of pessimism towards the UK among clients and it’s still incredible to me. A lot of negativity always interests me because actually, that is when the opportunities are rife. I think the UK has been written off far too quickly.”