Buy British: Bargain UK Funds Left Behind The Rally

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  • After a stellar 2022, the UK market has been left for dust in 2023 amid a growth resurgence
  • Upside inflation surprises have cranked up the pressure on the Bank of England
  • The UK market remains attractively valued compared to overseas markets and its own history

“After a stellar 2022 for the UK’s FTSE All Share index relative to overseas markets, 2023 has seen it left for dust. Japanese, American, European and Emerging markets have all had a stronger first half of the year. The difference in returns from growth and value styles was over this period was stark with the MSCI AC World Growth index up c18% and the MSCI AC World Value index down c1%.

The obvious question is why the turnaround? Well in the US, inflation has continued its steady downward trajectory. This has given investors confidence that the Federal Reserve has rates very near, or at, their peak. The market doesn’t need to see rates falling for this to boost growth stocks. After all, market prices reflect future expectations.

Here in the UK, upside surprises to inflation expectations have cranked up the pressure on the Bank of England. While headline inflation has been falling, core inflation, which excludes energy, food, alcohol and tobacco has not, and now sits at its highest level in over 30 years.

These excluded goods have volatile prices and tend to be influenced more by taxation than interest rates – so core inflation gives a good glimpse into how prices are changing in the wider economy.

The UK is suffering from a combination of energy related problems and a tight labour market, with a rise in early retirements, long term sickness and Brexit all contributing to higher inflation here than elsewhere. So, we may well have to get used to the idea of higher rates for longer than we were expecting.

This has contributed to the domestic market trading cheaper than other major markets and versus its own history. Most sectors are valued below their historical averages and valuations are particularly low among smaller companies which have been hit hard by the rate rising cycle.

Best of UK Fund Ideas

Fidelity Special Situations

  • Manager Alex Wright employs a contrarian investment approach and invests in unloved companies.
  • Wright has over 20 years investment experience and is supported by a large, well-resourced team of investment professionals at Fidelity.
  • While investment styles go in and out of favour, Wright has never deviated from his longstanding investment approach.

FTF Martin Currie UK Mid Cap

  • Manager Richard Bullas specialises in investing medium-sized UK businesses, often considered to be the ‘sweet spot’ between growth potential and maturity.
  • He aims to deliver income and capital growth over the longer term by investing in quality companies trading at attractive valuations.
  • Bullas has the experience, skill and team support to deliver good long-term returns to patient investors.

Royal London UK Smaller Companies

  • Lead manager Henry Lowson has spent his entire investing career focused on analysing UK small and medium-sized companies.
  • Lowson and deputy manager Henry Burrell aim to deliver long-term growth by investing in some of the smallest companies in the UK stock market with plenty of growth potential.
  • The managers are well placed to pick out hidden gems in this under researched area of the market.”

Article by Joseph Hill, senior investment analyst, Hargreaves Lansdown