Over the past three years the UK market has struggled to reproduce the gains experienced by other developed economies as a changeable political backdrop has increased uncertainty.
The ambiguity caused by the UK’s status within the EU ahead of the 2016 referendum and its relationship with the bloc following the ‘leave’ victory has, more recently, led to large sums being withdrawn from UK equity funds.
In addition, a minority government overseen by a divided Conservative Party and the growing appeal of an increasingly left-wing, Jeremy Corbyn-led Labour Party has created further concerns.
As such, the FTSE All Share index has risen by just 36.24 per cent over the past three years against a 53 per cent gain for the broader developed markets-focused MSCI World index, as the below chart shows.
Performance of indices over 3yrs
Source: FE Analytics
While uncertainty over Brexit could remain a feature of markets for some time yet and with no parliamentary elections due until 2022, investors are increasingly looking for managers able to weather the turbulent political conditions.
Below, experts from Interactive Investor highlight several funds and trusts that might be able to help investors in the current political climate.
Scottish Mortgage Investment Trust
First on the list is a popular and well-liked strategy among investors: Scottish Mortgage Investment Trust, recommended by analyst Dzmitry Lipski.
The £8.4bn trust is managed by James Anderson and Tom Slater; they invest a high conviction portfolio of global names and are also able to invest in unquoted companies.
Lipski said Scottish Mortgage is a flagship for growth-focused parent Baillie Gifford’s campaign on ‘actual’ investing, which espouses deploying cash into tangible, sustainable activities that allow companies to grow and prosper.
“‘Actual’ investment requires a willingness to be different, to accept uncertainty and the possibility of being wrong – but the long-term benefits are clear,” he explained. “It isn’t for the faint-hearted, but it has a clear, well-defined, unflinching vision which even in the tough times will give investors comfort.”
Over three years, Scottish Mortgage has made a total return of 107.49 per cent against a 65.45 per cent gain for its average IT Global peer and a 55.40 per cent rise for the FTSE All World benchmark.
The five FE Crown-rated trust is currently trading at a premium to net asset value (NAV) of 2.6 per cent, is 9 per cent geared and carries an ongoing charge of 0.37 percent, according to the Association of Investment Companies (AIC).
City of London Investment Trust
Next on the list is a closed-ended UK equity strategy: City of London Investment Trust, managed by Job Curtis and recommended by Interactive Investor head of investment Rebecca O’Keeffe.
“With 27 years managing City of London under his belt, Curtis has played a major role in helping this company deliver over half a century of uninterrupted dividend increases despite the many crises experienced during that time,” she said.
“Curtis combines consistent long-term outperformance with a capital preservation mindset, which allows investors to grow their wealth without taking on excessive levels of risk.”
Performance of trust vs sector over 3yrs
Source: FE Analytics
City of London has made a total return of 29.91 per cent over three years, as the above chart shows.
The £1.7bn trust is currently trading at a 1.3 per cent premium, is 10 per cent geared, has a yield of 4.4 per cent and charges of 0.41 per cent, according to AIC data.
Fundsmith Equity
Another favourite among investors that appears on the list is FE Alpha Manager Terry Smith’s £18.6bn Fundsmith Equity fund, recommended by head of equity strategy Lee Wild.
Like Scottish Mortgage, the five FE Crown-rated fund invests in a high conviction, concentrated portfolio of global equities that meet its criteria.
Veteran investor Smith looks for high quality businesses at attractive valuations, with advantages that are difficult to replicate, which do not require significant leverage to generate returns, have a high degree of certainty of growth from reinvestment of cash flows and are resilient to change.
“With trade wars having been a key investor concern over the last year or so, investors need a manager who is resilient, focused and committed,” said Interactive Investors’ Wild.
“These traits are met and exceeded by Terry Smith, who has long recognised the value of picking global growth companies that are good value and building a long-term portfolio with them.”
He added: “With plenty of his own skin in the game, investing his own money alongside investors, Smith has an alignment of interests that many will appreciate.”
Over three years Fundsmith Equity has made a 72.04 per cent total return, while the average IA Global peer has produced a gain of just 46.90 per cent. It has an ongoing charges figure (OCF) of 1.05 per cent.
LF Lindsell Train UK Equity
Wild’s second pick is FE Alpha Manager Nick Train’s well-renowned LF Lindsell Train UK Equity fund. Like Smith and Anderson, Train is another high conviction manager with a long track record of success.
“Manager Train stresses that he cares more about maintaining or growing the real value of investors’ capital and income over time than outperforming a stock market index, but that hasn’t stopped the fund being a runaway success,” said Wild.
“Its stellar performance makes it a firm contender for investors who are hoping that the UK stock market is finally going to come out of the shadows of Brexit.”
Train targets cash-generative stocks that will survive over the long term by maintaining competitive advantages through monitoring changing tastes and staying ahead of structural market changes.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
LF Lindsell Train UK Equity has made 45.93 per cent over three years compared with a 29.19 per cent gain for the average IA UK All Companies peer. It has an OCF of 0.68 per cent.
Herald Investment Trust
The final strategy and O’Keefe’s second choice is the £867.2m Herald Investment Trust, which invests in smaller listed companies in the communications and multi-media sectors.
O’Keefe said manager Katie Potts is “one of the unsung heroes of the investment trust sector” and recently marked 25 years at the helm of the trust.
“Whilst past performance is no guide to the future, and this trust is at the racier end of the investment spectrum, Potts has significantly outperformed the wider investment trust sector over the last 10 years,” she said.
Over the past three years Herald Investment Trust has made a total return of 86.47 per cent compared with a 26.70 per cent gain for the Numis Smaller Companies + AIM (excluding investment companies) benchmark.
The trust is currently trading at a discount to NAV of 15.1 per cent, is not geared and has ongoing charges of 1.15 per cent.