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Mark Dampier: Ignore UK equity funds at your peril

Politics has caused many investors to fall out of love with the UK stockmarket but it has plenty more to give

I wonder how many of you, like me, hope future referendums will be banned. Scotland’s vote on independence set family against family but that pales in significance to the UK’s decision to remain in or leave the EU. I cannot remember any other political event being so divisive.

Perhaps the social media world we live in accentuates this, where those with the most extreme views seem to be heard the loudest. Even party politics has moved to the extreme now, given Labour’s huge swing to the left.

Once again, the prevailing view from home-grown investors is that the UK is a poor place to invest. Indeed, recent problems encountered by Neil Woodford highlights the UK’s current propensity to punish any company that disappoints.

UK equity funds lose £290m in July

Simply put, UK investors have always found “sexy” overseas markets a more attractive proposition. In the 1980s it was Japan, when a 30 per cent exposure to the region was not uncommon. Asia and emerging markets have nearly always fit the bill while, more recently, numerous specialist sectors, from biotechnology to robotics, present far more exciting opportunities than the boring UK stock market.

But ignore it at your peril. The fund managers I meet with find plenty that excites them, particularly those that invest in smaller companies.

Hundreds of UK entrepreneurs with fresh new businesses and disruptive technologies provide a rich hunting ground, and the success of these businesses is generally unrelated to politics. Consider recent performance from the likes of Marlborough or Old Mutual, both investment houses we have backed for a decade or more. Both manage small- and mid-cap funds and both have been on a tear over the past two years, posting gains of 40 to 50 per cent, despite Brexit.

Our analysis shows the UK and Europe to be home to the best stock picking investors, and the US the hardest area to find good active fund managers. For most UK investors, however, the grass is always greener elsewhere and this view has become ever more dominant with the growth of the internet.

Advisers divided over UK equities amid Brexit uncertainty

There is an enormous wealth of information available online, including 24-hour access to current valuations. With this in mind, it is not surprising momentum-based strategies have begun to feature at the heart of peoples’ portfolios, while patience has fallen by the wayside. Yet patience is such a simple and well-rewarded strategy.

Funds investing in Europe are popular today but you could not give them away in 2012 as investors worried over “Grexit”. What a wonderful opportunity for the patient investor.

It is no secret UK equity income is my favourite area to invest, although the sector has undoubtedly had a harder time of late. It is certainly true the UK faces plenty of uncertainty in the form of Brexit. There is arguably even more uncertainty in terms of wider politics. A change in government, particularly to a Corbyn-run administration, would likely send sterling on another downward slide.

That said, I have found constantly worrying about the potential outcome of future events to be largely pointless. Even if you correctly call the outcome of an event (and let Brexit serve as a reminder this is not as easy as it seems) you then need to correctly interpret how it will affect financial assets. It is a near impossible task to get both elements right and it can also prove rather costly to make constant changes to a portfolio.

Rather than focus on individual events, I watch the flow of investors’ money. I find this often highlights future opportunities.

Statistics from the Investment Association currently show redemptions from UK equity sectors, which is hardly surprising given the negativity surrounding the UK at present. Meanwhile, overseas sectors – even Europe – have seen record investment levels.

Despite what politics and the media throw at it, the UK continues to be popular with overseas investors. Weaker sterling only serves to increase this, with property investors particularly looking to take advantage of the near 15 per cent discount it provides. An ageing Western demographic will continue to drive the demand for dividends and, while overseas companies have begun to follow the UK’s lead, London remains the key market for equity income.

There is plenty going for the UK and the patient investor should not be deterred by recent events. Do not write off your own stock market; it is more resilient than you might think.

Mark Dampier is head of research at Hargreaves Lansdown


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