UK indices have been trailing their peers from other major markets since the beginning of the year, despite last year’s relative good performance.
Indeed, the FTSE 100 was one of the few major indices that ended 2022 on a positive note.
Russ Mould, investment director at AJ Bell, said: “UK investors will certainly be looking to the US and wondering why the FTSE 100 once again is lagging the S&P 500.
“The UK blue chip index enjoyed a burst in January, it fell back in February, recovered in March and April, and is now back to where it began the year.”
Performance of indices YTD
Source: FE Analytics
In spite of this, experts believe that UK savers should have up to a quarter of their portfolio invested in their home market.
This is because the UK market gives exposure to sectors such as mining, oil and pharmaceuticals as well as a range of world-class businesses. Moreover, investing in domestic firms enable investors to avoid currency risks.
As portfolios have become more global, investors might have little to no allocation to the UK. Trustnet asked experts to pick a core fund to start building an exposure to the UK market.
David Henry, investment manager at Quilter Cheviot, chose BlackRock UK Equity, which invests in UK businesses of all sizes, including small-caps.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund has outperformed the IA UK All Companies sector and the FTSE All Share index over 10 years. It is also a top quartile fund in its sector over one and three years.
Henry said: “The fund is managed by three different investment management teams who each assume responsibility for a ‘sleeve’ within the portfolio – as a consequence there is less risk of an individual manager going off the boil.
“The primary factor tilts within the portfolio are towards quality and growth, which I feel will serve investors well during a potentially challenging time for the UK economy.”
For an approach less reliant on the performance of the mining, oil or financial industries’ performance, Andy Merricks, fund manager at 8AM Global, suggested IFSL Church House UK Equity Growth.
He said: “In a sector where so many funds share commonality in their portfolios with top 10 holdings often mirroring each other but in perhaps a slightly different order, the Church house fund is multi-cap within the UK universe and so looks different from many others.
“It is a focused portfolio holding only 36 stocks and is still only £92m in size, which allows it flexibility.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
While the five FE fundinfo Crown-rated fund has beaten both its sector and benchmark over 10 years, it’s been through all the different quartiles within the IA UK All Companies sector over 10 years.
Interestingly, the fund has been top quartile over one year amid a good period for the FTSE 100, despite its lesser reliance on mining, oil and financials, which usually are the main drivers of the UK blue-chips index.
Sustainability is another angle through which investor can start building their UK exposure. Sheridan Admans, head of fund selection at Tillit, suggested doing so via the Ninety One UK Sustainable Equity fund.
He said: “This fund prioritises company that has both high-quality growth characteristics and a commitment to sustainability.
“The team behind the fund looks for company that has a considered approach to sustainability and a positive impact on society. Idea generation is driven by sustainable themes that are key to transformation toward a more sustainable future.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund is a relatively newcomer, having been launched at the end of 2018. It has since then beaten its benchmark and sector. It is in the sector’s fourth quartile over three years but is having a good year so far, swinging between first and second quartile over six months, three months and one month.
While the previous funds are all part of the IA UK All Companies sector, Dan Cartridge, assistant fund manager at Hawksmoor, picked Gresham House UK Multi Cap Income, which sits within the IA UK Equity Income sector.
The fund invests within the whole UK market but also taps into the potential of mid- and small-caps.
Cartridge said: “This is a multi-cap fund with a remit to look for the best opportunities across the whole UK market, although it typically runs with a small and mid-cap bias where inefficiencies and mispricing tend to be greater.
“Around 30% of the fund is presently exposed to companies listed on the FTSE 350, with the rest listed on AIM and FTSE Small Cap.”
Performance of fund vs sector since launch
Source: FE Analytics
The fund was launched in June 2017 and has outperformed its sector since then. It has also been a top quartile fund in the IA UK Equity Income sector over five years and three months, but also second quartile over three years, one year and six months.
Cartridge added: “The fund is run with a quality-growth philosophy, but with a close eye on valuation. Since launch, the price-to-earnings ratio of the fund has typically been in the 12-14x range and it is currently valued at the low end of that range.
“The quality of the portfolio is close to the highest it has been as the managers have been taking advantage of the sharp selloff in quality/growth stocks, which were re-priced amid outflows from some large UK mid cap funds in recent years.”
The fund’s size is currently around £434m, which Cartridge sees as a positive factor, as it is small enough to be dynamically managed but also large enough so that ongoing costs are at a competitive level.