Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
OUR experts’ Select 50 choice of favourite investments includes nine funds focused on the UK. Between them, they cover a wide range of styles and approaches to this particular market.
Here we take a look at those nine funds in more detail and what they’re looking to achieve.
It’s best to start with what the UK market is known for - equity income. The FTSE 100 index of the UK’s largest companies is a hotbed of some of the world’s largest dividend payers, ranging from energy majors like Royal Dutch Shell and BP, to banks like Lloyds and HSBC. Though many came under fire over 2020 amid the heat of the pandemic, most have since resumed their payments.
Two funds on our Select 50 list invest with the intention of providing a regular income for investors.
The first is the Franklin UK Equity Income Fund. This fund’s focus is on companies where the dividend is not just high compared to the market, but sustainable and likely to grow. The management team is keen to understand the underlying operations of a business, which they feel is crucial in assessing its ability to pay an income.
Another option is the LF Majedie UK Equity Fund *. This fund offers a bit of everything. Among its top 10 holdings you’ll find familiar FTSE faces like Unilever, Tesco and NatWest, but its managers also maintain a dedicated allocation to smaller companies.
The fund’s managers pick companies with a view to keeping performance smooth through market cycles. That means it could suit investors with a medium to long term timeframe who are searching for a core income strategy.
Big vs small
When we talk about the UK market, our mind’s eye tends to head straight to the FTSE 100 largest companies. Here, you’ll find the most well-known brands and the biggest dividend payers.
Investors should remember, however, that the UK market is a broad one that extends far beyond its 100 biggest names. Moreover, investors should expect quite different things from companies as they look up and down the cap scale.
The UK’s large companies, or large “caps”, come with a distinctly international feel. Approximately three quarters of the earnings of the UK’s top 100 listed companies come from overseas. In addition, around two fifths of British companies now pay their dividends in dollars.
The Lazard UK Omega Fund is one with a slight bias towards large caps. Fund manager Alan Custis believes having a world view is important when focusing on the large-cap end of the market, given many of his UK names will have a truly global reach. To inform his decision-making he draws upon the global Lazard network, making use of the firm’s international footprint and knowledge base.
Custis sees this fund as a “UK best ideas portfolio”, which explains the particularly concentrated portfolio - holding anywhere between 25 and 35 companies at any one time means each of his “ideas” can meaningfully influence the fund’s performance.
If the Lazard UK Omega Fund has a bias to large-caps, the Threadneedle UK Mid 250 Fund is more explicit in its focus on mid-caps. The smaller down the cap scale you go, the more room you give companies to grow. On the flip side, smaller companies tend to be riskier. This fund invests only in mid-cap UK stocks with significant growth potential - a “goldilocks” approach going after companies that are just the right size.
Growth vs value
Though not necessarily mutually exclusive, you’ll often see funds or managers subscribe to one of two investment styles - growth or value.
Growth companies are usually more expensive than value, but the idea is they’ll continue to deliver rising earnings regardless of market conditions. The appeal of value companies, on the other hand, lies in valuations which look cheap compared with their fundamental value.
Our Select 50 list features two UK funds for each style.
For growth-seekers, the Liontrust UK Growth Fund could be a good option. Managers Julian Fosh and Anthony Cross look for companies with one of three “intangible assets” - intellectual property; a strong distribution network; and high levels of recurring revenue. In the manager’s eyes, each of these provides a company with ‘pricing power’ - i.e. the freedom to charge a little bit more, which in turn brings about and sustains high profits.
Another UK growth fund is the Fidelity UK Select Fund. Managed by Aruna Karunathilake, the fund aims to identify quality businesses and hold them for the long term. Karunathilake is looking for “companies with a strong brand, that dominate their industry, and that can demonstrate good cash generation, a strong balance sheet and a simple business model.” That leads him to certain industries, such as consumer goods and media companies, over others like financials and life insurers.
For value-seekers, Alex Wright’s Fidelity Special Situations Fund is one to consider. The rationale behind Wright’s process is that highly-valued companies have little potential to rise much further, whereas undervalued shares can rise sharply if things turn out to be better, or no worse, than the consensus expects.
Similarly, the Jupiter UK Special Situations Fund is another fund with a clear value focus. Fund manager Ben Whitmore is drawn to the sort of out-of-favour, cheap stocks that the rest of the market has overlooked, but in which he sees opportunity.
To find these opportunities, he screens for cheap companies and looks at their 10-year average earnings. After this, a prospective company is treated to intense fundamental analysis, to ensure the cheap price tag isn’t reflective of the stock’s underlying quality.
It’s another with a relatively concentrated portfolio - around 30-50 names - with a 40% weighting given to its top 10 holdings.
Sometimes, managers like the freedom to explore all parts of their designated market, unencumbered by benchmarks which force them to keep a quota of their portfolio in certain places.
The Artemis UK Select Fund is similar to the Lazard UK Omega Fund in that it too pursues a “best ideas” approach, which sees manager Ed Leggett pay little heed to the benchmark, both in terms of size and sector.
Given this freedom, the fund will only invest in a company if the management team have a “strong view” on a company. This fund also boasts a relatively concentrated portfolio, typically around 40-50 names, slightly more than the Lazard UK Omega Fund.
Investors should also note that this fund has the ability to hold “short” positions on companies. Shorting involves the managers borrowing a stock, selling the stock at market value, then buying the stock back at (hopefully) a lower price to return it to the lender. Shorting is inherently riskier than the conventional ‘long’ positions most funds take, but can lead to higher returns.
More on Select 50
* Clarification: at time of writing (18/11/2021) we may have given the impression that this is an income fund. As per the factsheet its objective is to deliver a total return (the combination of income and capital growth) in excess of the FTSE All-Share Total Return Index, after all costs and charges have been taken, over any five year period.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The Franklin UK Equity Income Fund, Liontrust UK Growth, Fidelity UK Select, Jupiter UK Special Situations, Artemis UK Select and Lazard UK Omega, invest in a relatively small number of companies so may carry more risk than funds that are more diversified. Before you invest in a fund, please ensure you have read Doing Business with Fidelity and the Key Information Document (KID). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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