The value train is still at the station
This article first appeared on trustnet.com on 5th December 2022 Clearly, 2022 has been a painful...
According to the Investment Association, the proportion of UK retail investor assets in UK equity funds fell to 14% of total assets at the end of June, down from 39% in 2005*.
This fall in popularity has intensified in recent years: since the referendum was announced in January 2016, UK equities have seen sustained outflows of £12.7 billion*.
Meanwhile, institutional investors’ allocation to UK equities also fell below 30% for the first time down 18 percentage points from 10 years ago*.
It’s been known for a long time that overseas investors have been shunning UK equities in light of ongoing Brexit uncertainty, and UK investors have also been slowly diversifying their portfolios over a number of years, but the magnitude of the fall in asset allocation will come as a surprise to many.
Underperformance in the UK has played a part in the fall in popularity. Over the past few years, the UK stock market has struggled to keep up with its developed market counterparts and this underperformance has been exacerbated in recent months. While both the US stock market (the S&P 500) and Japan’s TOPIX are up 7.9%** and 3.1%** respectively year to date, and the MSCI Europe ex UK is almost in positive territory (-0.6%**), our stock market, as measured by the FTSE All Share, is still down 21%**.
But while the overhang of Brexit has impacted the UK stock market’s recovery from the March lows, arguably the bigger reason is the traditional composition its largest companies, many of which are financials, consumer discretionary and oil & gas firms – all ‘value’ areas that are out of favour and struggling in the current climate.
With another Brexit deadline looming, interest rates likely to remain low for the foreseeable future and inflation nowhere to be seen, it is unlikely there will be a changing of the guard any time soon. Stock markets with higher weightings to technology and growth sectors are more likely to flourish.
That said, while share prices have not been strong, UK companies have been surprisingly resilient in the COVID-19 environment. As Alex Wright, manager of Fidelity Special Values investment trust, told us in his podcast interview this week, the disruptions in supply chains that investors have been worrying about if a hard Brexit comes to pass are not that dissimilar to those we’ve seen because of COVID. “A lot of UK companies have done reasonably well dealing with the logistics of the pandemic because they had that hard Brexit planning in place already,” he said.
And, if a vaccine was delivered or the Brexit deal was positive – or we even got both – we could see a bounce in some of those unloved sectors. In which case, value-orientated funds like Jupiter UK Special Situations, JOHCM UK Dynamic and Schroder Recovery could do well.
In the absence of any of those scenarios, the UK’s smaller companies – which by their very nature are more growth orientated – and those in the AIM index which has a higher technology component, have also fared better than their larger counterparts.
While this area of the market is vulnerable to uncertainty and market downturns, as it tends to get sold off as investors de-risk, it has proved to be a good long-term investment in the past. The UK also has an abundance of top quality stock-pickers in this space who have proven their ability to make the most of opportunities.
All eight Elite Rated UK smaller companies funds, with a track record dating back to the EU referendum, have comfortably beaten the FTSE All Share (13.7%^) and FTSE Small Cap indices (27.6%^).
Year to date, the strongest fund has been Marlborough UK Micro Cap Growth (-2%**), followed by Liontrust UK Smaller Companies (-2.5%**) and Marlborough Special Situations (-4.3%**). The FTSE Small Cap index is still posting losses of 14.4%** while the FTSE All Share is down 20.7%**.
For those still wanting to stick to home country investments, this area of the market may prove to be the more rewarding for now.
*Source: Investment Association, Investment Management Survey 2019-2020
**Source: FE Analytics, total returns in sterling, 1 January 2020 to 23 September 2020
^Source: FE Analytics, total returns in sterling, 24 June 2016 to 23 September 2020