Finding value in the UK – 4 fund ideas for investing in your home market
It has been a challenging time to be an investor in UK companies for some time. But as the saying goes, it is often darkest before the dawn.
Why would you bother investing in the UK stock market? After several years of underperformance and negative headlines there is no doubt that domestic investors might be concerned about their existing investments in the UK – or perhaps weighing up making any new investments to use up their ISA allowance as we approach the end of the tax year on 5 April.
However, we at Barclays firmly believe that UK shares and investment funds merit a place in a diversified portfolio.
UK uncovered
Some investor concerns centre around a lack of exciting ‘new world’ companies to back, and that the choice is limited to ‘old economy’ companies such as those in oil and mining sectors.
While other stock markets, particularly the US, have delivered better returns than the UK in recent years and the UK is not home to any large technology companies, things can – and do – change.
It’s also important to remember that there is no evidence to say the UK, or any market, must have exposure to a specific sector or sectors to perform well over the long term.
Some commentators believe that technology shares of today could be equivalent to the railroad sector of the 1800s or Tulip bulbs in the 1600s. In both cases, speculators drove prices of those to unsustainable levels, only to subsequently crash, wiping out the gains made by those who were not able to sell out before prices fell. Financial price 'bubbles' have grown and burst over hundreds of years.
That is one of many reasons why it’s important to have a wide spread of geographical locations in a portfolio – so that if one region suffers a market shock, there are others that will hopefully be doing well.
The UK is a defensive market
There are a number of 'old economy' UK shares and sectors in the UK and most other major stock markets around the world. Multinational businesses operating in such sectors are currently out of favour with some investors who favour innovative technologies that will provide society with unlimited amounts of clean energy to heat and power our homes and our transport networks.But in uncertain times, the share prices of these so-called old economy sectors may perform well as buyers look for perceived safe havens and low valuations. This was last seen in 2022, a year when the UK market was one of the best performing globally.
Opportunity knocks
Earnings from the UK's largest companies are predicted to grow by over 10% in 2025 according to Goldman Sachs, the US bank, with the UK's FTSE 250 index of medium sized companies expected to grow their earnings by over 12%. European, Japanese and US markets, according to the same bank, are forecast to deliver similar returns.
Investors pay less for earnings in the UK than they do in other markets. On average, based on Goldman Sachs’ analysis, it would currently cost around £20 to buy £1 of earnings produced by US listed companies. In Japan, you would have to pay £15 for the same £1 of earnings. In the UK, you would only pay just over £11 for £1 of earnings . The UK looks – at least on this basis – like a 'cheap' market. In other words, you could get more for your money by choosing to invest in British companies.
Sweet Music
Managing your investments could be thought of like an orchestra. Every instrument has a unique and important role. The same goes for a portfolio of shares or funds. A UK fund investment may not play the melody and lead the market. But it can take up the tune when other markets are having a rest, providing useful diversification and balance to your portfolio returns.
Shares or Funds? Active or Passive?
There are plenty of ways to invest in UK companies. You could buy shares and own a portion of the company directly or you could choose to invest in a fund. Managers of funds such as JO Hambro UK Equity Income, Artemis Income, or the Barclays GlobalAccess UK Opportunities fund and its three underlying managers have impressive long term track records by actively choosing companies to invest in.
These fund managers look to create a portfolio of companies that they think can deliver share price performance and income better than the wider market. And the best ones, over the long term, have been able to do that. That’s why some investors are willing to pay a little more to choose Actively managed funds over Passive ones.
Of course, past performance is no guide to future returns, and investing in active funds does not guarantee index-beating performance.
Passively managed funds such as the iShares UK Equity Index fund aim to replicate the performance of an index, such as the FTSE 100. The fund will buy shares in all 100 companies and in the same proportions as their market value. The value of the fund therefore, will move in line with the change in the value of the FTSE100 Index. Passive funds generally have lower costs than active funds but will always marginally under-perform their index once costs are taken in account.
