New prime minister Liz Truss has assembled her cabinet and faced her first prime minister’s questions in the House of Commons. Now begins the process of running the country.
Her decisions over the next several months – and the ones made by those she has placed in power alongside her – will have wide-ranging impacts on a number of industries and sectors.
From the cost-of-living crisis brought about by soaring energy bills, to levelling up the UK economy while keeping control of the public finances, there are numerous potential pitfalls but also opportunities.
Although viewed as a continuation of the Boris Johnson administration, there are some key differences. As such, experts look at three funds that might stand to benefit from the new prime minster’s policies.
Infrastructure
Rob Morgan, chief analyst at Charles Stanley Direct, said Truss appears keen to kickstart the economy through cuts in tax and bureaucratic red tape.
Yet with finances in a weak position her hands may be tied, especially as the priority is clearly turning to acting on energy prices, with a huge package costing upwards of £100bn being mooted.
“This is inflationary in the medium term and potentially puts more pressure on the pound and on the Bank of England to keep interest rates higher for longer. It is not an easy environment and one where it is best to nick singles rather than swing the bat for a six,” he said.
He pointed therefore to infrastructure, which on a risk-reward basis has been on the best asset classes available this year. The IA Infrastructure sector has made the third-highest returns of all Investment Association peer groups so far in 2022, but with significantly less volatility.
Within the asset class, Morgan suggested the FTF ClearBridge Global Infrastructure Income fund, noting that having lots of overseas diversification and tapping into reliable income streams that are resilient to inflation was “highly desirable”.
Total return of fund vs sector YTD
Source: FE Analytics
“This fund offers exposure to the broad and varied listed global infrastructure asset class. The management team is made up of experienced specialists that have built an impressive record. It is globally diversified and exposed to both regulated and ‘user pay’ assets such as toll roads,” he said.
“Around 90% of underlying revenues in the portfolio are inflation linked, so the income and the portfolio could be relatively resilient whatever is thrown at it, while there is also an option for a currency hedged unit classes for those more sanguine about sterling.”
It also has the benefit of investing globally, something that may be crucial if the rest of the world fails to believe in the new prime minister. FTF ClearBridge Global Infrastructure Income is 11% weighted to the domestic market.
UK funds
Jason Hollands, managing director of corporate affairs at Evelyn Partners, said a key issue for Truss is tax cuts, though the largest part of this isn’t actually a tax cut at all but rather the scraping of the planned increase in corporate tax hikes scheduled for next year under Rishi Sunak’s stint as chancellor.
“That will be welcome news to businesses that make a high proportion of their prospect in the UK,” he said, which combined with a package to address energy bills will help to temper the “doom-laden” inflation forecasts.
“This should prove a source of relief to battered up UK mid- and small-cap stocks which have had a torrid year and reflect very bearish sentiment towards the UK economy,” said Hollands.
While the economy still faces many headwinds and a recession remains likely, Truss’ actions could mean that the impending drop is shorter and shallower than first feared, making now an enticing entry point for investors who can capitalise on a market that fallen too far in anticipation of a worst-case scenario.
“Remember, markets are forward looking and when it is confirmed we are in a recession, investors will be looking ahead to the recovery phase,” Hollands said.
He suggested investors should look for a contrarian fund that has significant mid- and small-cap exposure such as the Fidelity Special Values trust.
Managed by Alex Wright and Jonathan Winton, shares are on a 9% discount to the net asset value, making it a cheap option at present.
“Around 37% of the portfolio is in mid-caps and 43% in smaller companies and AIM and it is a highly diversified portfolio of more than 100 holdings,” said Hollands.
Fidelity Special Values has struggled so far in 2022. Although its penchant for value companies has meant it has beaten the average IT UK All Companies peer, its focus on smaller companies has hampered it versus the FTSE stalwarts that make up the majority of the FTSE All Share index, as the below chart shows.
Total return of fund vs sector and benchmark YTD
Source: FE Analytics
Laith Khalaf, head of investment analysis at AJ Bell, agreed that smaller companies may be the way to go for investors looking to make a Truss-related move.
“’Trussonomics’ might not prove to be great for the long-term balance sheet of the UK, but in the short term, tax cuts and an energy price freeze should be positive for the UK consumer, and the companies that provide them with goods and services,” he said.
“UK smaller companies stand to be disproportionate beneficiaries of this trend, and in an uncertain economic environment where dividend payments are also likely to be prized, investors might consider a fund like Montanaro UK Income, which combines an income focus with a preference for companies further down the cap scale.”
Like the Fidelity trust above, the fund has struggled this year, down 25.8% versus the IA UK All Companies average of -11.1%, however this could lead to a significant rebound if investor sentiment on the UK market improves.
Fund | Sector | Fund size | Fund managers (s) | Yield | OCF | Launch date |
Fidelity Special Values PLC | IT UK All Companies | £836m | Alex Wright | 2.6% | 0.69% | 17/11/1994 |
FTF ClearBridge Global Infrastructure Income | IA Infrastructure | £1,578m | Nick Langley, Shane Hurst, Daniel Chu, Charles Hamieh | 0.0% | 0.75% | 16/08/2022 |
Montanaro UK Income | IA UK All Companies | £636m | Charles Montanaro, Guido Dacie-Lombardo | 3.4% | 0.83% | 30/11/2015 |