Focusing on fundamentals, buying into all-cap multi-factor funds and not obsessing over politics are some of the ways investors can maintain exposure to UK equities amid today’s uncertain backdrop, according to Redington’s Nick Samuels and Whitechurch Securities’ Ben Willis (pictured). 
This follows heightened political uncertainty within the home market, which has been caused by ongoing Brexit negotiations and the lack of a majority government in parliament. Not only this, rising inflation and lacklustre wage growth has started to squeeze UK consumers.
“The political backdrop for the UK clearly looks uncertain and this would appear to have consequences for the future of the economy, but so far the UK equity market has shrugged these concerns off,” Samuels, who is director of manager research, said. “Long-term investors should do the same, and use market volatility to top and tail equity allocations against their long-term strategic weights.
“In terms of funds, we are probably in the latter stages of this market cycle, and in the absence of a clear opportunity in a specific style or part of the market (in our view), we would look to all-cap, multi-factor UK funds.”
Willis, who is head of research at Whitechurch Securities, said: “We prefer to look at fundamentals such as relative valuations between areas in the UK market, and although we take stock of the macro also, we avoid focusing on the politics, which is impossible to position for or predict.
“Our approach therefore, has not really changed over the years and we prefer to adopt a contrarian approach when investing in equities and this is no different when investing in the UK.”
In the below article, Samuels and Willis each discuss three UK equity funds they deem to be particularly attractive at the moment.
First up is Aberforth UK Small Companies, managed by the firm’s six-strong investment team, which was chosen by Willis.
“As the fund title suggests, this is a smaller companies fund but focuses on value areas of UK smallers,” he explained. “This provides a more domestic, cyclical exposure to this area of the market, which has been out of favour due to all things Brexit but which could provide a decent recovery in the medium term.”
Over five years, the £253m fund has returned 131.42 per cent compared to its sector average and benchmark’s respective returns of 119.45 and 116.75 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has done so through the management team’s ability to identify genuine value opportunities; it uses in-depth financial and industrial analysis, as well as valuations in terms of both the stock market and corporate worth, to avoid potential value traps.
Examples of the 84-stock portfolio’s largest holdings include metal flow engineering company Vesuvius, bus and rail operator FirstGroup and housebuilding firm Bovis Homes Group.
Aberforth UK Small Companies has a total expense ratio (TER) of 0.86 per cent.
One of Samuels’ picks is R&M UK Dynamic Equity, which he has chosen because it blends valuation and momentum factors together as part of a screening process, then uses fundamental analysis to create a high-conviction portfolio.
The £193m fund is managed by FE Alpha Manager Philip Rodrigs and aims to provide long-term growth through a concentrated multi-cap portfolio of 48 stocks. For instance, it currently has a 54 per cent allocation to FTSE 100 stocks, 25.3 per cent to FTSE 250 constituents and a further 8.5 per cent to FTSE Small Cap stocks. It also has an 8.1 per cent weighting to AIM stocks and holds 4.1 per cent in cash.
All stocks within the portfolio are chosen to suit the market conditions at any given time and, as such, the manager adopts a dynamic approach to portfolio construction.
Over five years, the fund has outperformed its average peer and benchmark by 32.18 and 40 percentage points respectively with a total return of 108.87 per cent.
R&M UK Dynamic Equity has a clean ongoing charges figure (OCF) of 0.84 per cent.
Regarding the four crown-rated JOHCM UK Dynamic fund, Willis described it as a contrarian fund which focuses on value and recovery stocks.
“Although all positions within the portfolio have to pay a dividend it does not have to fulfil the IA Equity Income sector quota,” he explained.
“Predominantly large-cap focused, the manager invests in out-of-favour and unloved areas where he can see a catalyst for recovery. The only gripe with this fund is the small performance fee attached.”
Over five years, FE Alpha Manager Alex Savvides’ £580m fund has returned 111.59 per cent compared to its FTSE All Share benchmark’s return of 68.87 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Had an investor placed £10,000 into the fund five years ago, they would have received £2,566.03 in income alone.
The fund has a concentrated portfolio of 45 holdings, which are selected purely using a bottom-up process. Its largest individual holdings are BP, Shell, GSK and HSBC.
JOHCM UK Dynamic has a clean OCF of 0.86 per cent, yields 3.42 per cent and has a performance fee of 15 per cent on excess if the fund outperforms the benchmark.
Samuels’ second option is JPM UK Dynamic, which is £183m in size and is managed by John Baker, Jon Ingram and Blake Crawford.
Over five years, the fund has returned 104.99 per cent, outperforming the FTSE All Share and its sector average by a respective 36.12 and 28.3 per cent.
The fund adopts a quant-based approach to stock selection and runs three main screens on stocks. The first is the ‘value’ screen which uses measures such as price/earnings ratios; the second is the ‘quality’ screen which looks at sustainability of earnings growth and capital management capabilities; and the third is the ‘momentum’ screen which looks at changes in management structure and positive momentum of earnings and share prices.
The resultant portfolio consists of at least 40 individual holdings and sector weightings cannot exceed 35 per cent of the portfolio’s overall assets.
JPM UK Dynamic has a clean OCF of 0.93 per cent.
“CF Woodford Income Focus is the relatively defensive pick of my three,” Willis said. “You are usually in a safe pair of hands with Mr Woodford and his long-term track record is exemplary.
“Although relatively defensive, Woodford is starting to position the portfolio more towards domestic UK with an increase in allocation to housebuilders plus some choice positions in retail and the banks.”
CF Woodford Income Focus is the star manager’s newest fund, having launched in April this year after raising £553m – the third-biggest UK fund launch after his other two investment vehicles.
A constituent of the IA Specialist sector, the fund can hold an unlimited amount of the portfolio in global equities at any one time. However, this function is simply there in case the manager ever encounters a period where overseas equities boast brighter prospects.
Another notable feature of the fund is that it doesn’t have a set overall yield target. Instead, every stock in the portfolio must be on track to yield at least 5 per cent and be able to grow this distribution by 5p per unit in calendar 2018.
The 35-stock portfolio’s largest individual holdings include AstraZeneca, Legal & General and Imperial Brands. CF Woodford Income focus has a clean OCF of 1 per cent.
The final fund on the list is Ardevora UK Equity, which is managed by FE Alpha Manager duo Jeremy Lang and William Pattisson.
Unlike the aforementioned funds, the £188m vehicle is able to short stocks; it currently has 41 portfolio longs and 21 portfolio shorts.
Lang and Pattison adopt a bottom-up approach to stock selection and focus their process on behavioural analysis to spot anomalies. For instance, they will look for indication of excessive risk-taking within management teams, signs of overconfidence from analysts and signs of excessive anxiety among investors.
Unlike many of their peers, the managers deliberately distance themselves from meeting companies so as not to be emotionally influenced. Instead, they focus on stock prices, valuations, company accounts and analyst reports.
Over five years, the fund has returned 117 per cent compared to its average peer’s return of 76.69 per cent and its MSCI United Kingdom’s benchmark of 66.03 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Ardevora UK Equity has a clean OCF of 1.62 per cent.