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UK equities: Investors remain cautious despite stellar returns

The UK equities sector has been blighted by Brexit woes but fund managers are finding plenty of opportunities

UK equities sector

When it comes to UK equities, for the past two years there has been one phrase on everyone’s lips: Brexit. While there is nothing new to be said about the UK’s exit from the European Union, we remain in limbo as we wait to see if there is going to be a no-deal, hard or soft Brexit. Overall, the UK is a relatively unloved market at the moment and investor sentiment in the space remains low.

Looking at the Investment Association UK All Companies sector, it is clear investors are nervous about what lies ahead of March 2019.

The sector has remained hugely out of favour since the referendum vote despite some funds seeing stellar returns. The sector is varied in the way it can invest. The IA stipulates funds within it must have at least 80 per cent of assets in UK equities.

Different styles of management

Funds within the space will all aim to grow investors’ capital over the long term but each will go about management in different ways and styles. The majority focus on larger FTSE 100 companies but the sector stipulations allow investment in small- and mid-caps, so funds have full investment flexibility and freedom to take more risks.

Looking at a fund level, the sector is one of the largest in terms of constituents, with 262 from 104 fund providers. According to the latest figures available from the IA, the sector has £181.9bn in funds under management, making it the largest by size.

The UK All Companies sector is home to some exceptional fund managers with solid track records for investors looking for strong returns and good value. But this is clearly not important to investors when looking into net retail sales. The sector was the second-worst selling, seeing £354.7m in outflows, in June – the 15th consecutive month of outflows after being the worst-selling sector in Q2 this year.

It has been the worst-selling sector in the past four calendar years. AJ Bell estimates outflows have reached £9.1bn since the Brexit vote two years ago.

It is worth noting that many UK companies, while listed in London, have a very global coverage.

Some of the largest companies – particularly in the FTSE 100 – are conglomerates operating in multiple countries worldwide.

On the defensive

For example, the top five most-held stocks within funds in the sector are defensive global companies – BP, GlaxoSmithKline, HSBC, Royal Dutch Shell and British American Tobacco. Of all funds, 27 per cent hold BP within their portfolios.

The sector weightings within the space are varied and balanced, with the majority of stocks being financials and industrials. Whether this will be the case next year remains to be seen as some financial institutions have discussed moving elsewhere within the EU. In spite of outflows, funds in the sector have been performing well over the past few years.

The data on page 31 looks into fund performance over three and five years, but looking over one year it shows that performance has not been affected massively by Brexit woes. According to FE, UK equity funds have consistently been the most researched funds in each of the past three years.

The top-performing fund over the year to 21 August was the Baillie Gifford UK Equity Alpha fund, which returned 22.8 per cent, according to FE data.

The fund, managed by Gerard Callahan, does not have a typical UK All Companies feel. For example, there is no sign of the defensive regulars in its top 10 holdings. Rightmove, Hargreaves Lansdown, Ocado, emergency repairs company Homeserve and engineering group Renishaw comprise the top five holdings in the fund, which favours services, industrials and financials.

Of the 263 funds that have data available over one year, 254 saw positive returns in 12 months.

The nine that underperformed included well-known managers such as Neil Woodford, Invesco Perpetual’s Mark Barnett and Neptune’s Mark Martin.

The worst-performing fund was Quilter Investors UK Equity Income II, which is sub-managed by Woodford Investment Management and saw a 17.3 per cent loss.

Woodford’s own Equity Income fund was the third-worst performer, with a 7.8 per cent drop. The funds have similar stocks within their top 10 holdings, including tobacco giant Imperial Brands, legal financier Burford Capital and online estate agent Purplebricks.

While there is still a long way to go to improve investor sentiment in the UK space, the strong majority of returns could speak louder than any macroeconomic woes.

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