The UK economy contracted by nearly 10% in 2020, the worst figure since records began after World War Two. And with Britain in lockdown since the start of the year, a recovery may be hard to envisage at this point. But as stock markets are generally forward looking, is there an argument for investors getting ahead of the curve rather than waiting for the “all clear”?
The IMF has forecast growth to rebound sharply this year, by more than 4%, and possibly 5% in 2022 if the vaccine rollout continues at its current pace. Bank of England economist Andy Haldane says the UK economy is like a coiled spring, with consumers preparing to spend big when the economy reopens fully.
So which funds could investors consider for a swift recovery, and which might have a place in your portfolio if you foresee more difficult economic conditions?
3 Funds for a Recovery
“For a real turnaround, it would be value-orientated funds which fish for out-of-favour companies that would likely bounce back the most,” says Jonathan Miller, head of UK manager research at Morningstar. He picks Schroder Recovery, Jupiter UK Special Situations and Fidelity UK Special Situations as good options for a V-shaped recovery.
Schroder Recovery
With a Morningstar Analyst Rating of Silver, this fund fell 11% in 2020, but has delivered annualised returns of more than 8% over five years. Morningstar analyst Robert Starkey praises managers Nick Kirrage and Kevin Murphy, who have run the fund since 2006. While the fund’s performance is sometimes more volatile than the index on a short-term basis, investors are often rewarded by long-term performance.
“This strategy continues to be one of our highest-conviction ideas for investors seeking deep value in the UK equities market,” says Starkey. Barclays (BARC) and Natwest (NWG) are the second and third largest holdings in the portfolio and while banks had a tough 2020, they have been given the green light to restart dividends by regulators.
Jupiter UK Special Situations
Another value-focused fund that struggled in 2020, losing 13.7%, but has again produced strong long-term performance, with annualised returns of 7% over a 10-year period. Top holdings include insurer Aviva (AV.), vaccine maker GlaxoSmithKline (GSK) and educational publisher Pearson (PSON).
Like the Schroder Recovery fund, Jupiter UK Special Situations has had the same manager since 2006, in this case Ben Whitmore, who has “proved an astute investor over time, with a clear ability to select stocks in a dispassionate and disciplined fashion”, according to Morningstar's Starkey. Morningstar assigns the fund an Analyst Rating of Gold, rating it “a great choice for more patient investors, who we expect to be well rewarded over a full investment cycle”.
Fidelity Special Situations
Highly rated by Morningstar analysts – with a Silver Rating – this fund also suffered double digit losses in 2020. At around £2.5 billion of assets under management, it is one of the biggest UK value funds rated by Morningstar. Manager Alex Wright has managed the fund since 2014 – as well as its closed-end counterpart Fidelity Special Values (FSV) – and Morningstar analyst Fatima Khizou says he is a “thoughtful investor whose knowledge of the portfolio, and insights at company and industry levels, continue to impress”.
Khizou describes the fund as an all-cap strategy and one which has performed well against the FTSE AllShare index and Morningstar category peers. Top holdings, according to Morningstar Direct data, include insurer Legal & General (LGEN), Aviva, and tobacco firm Imperial Brands (IMB), which is only one of a handful of UK companies rated as 5-star (very undervalued) and with a wide economic moat.
2 Funds for an Economic Slowdown
What if you are more cautious about the economic outlook?
“I think having a fund manager with a strong track record of picking winning stocks across small, medium and large companies can help provide broad exposure to compelling businesses operating in a range of different industries,” says Morningstar’s Miller. He rates Axa Framlington UK Select Opportunities and BlackRock UK Special Situations as more all-weather funds.
Axa Framlington UK Select Opportunities
With a Morningstar Analyst Rating of Bronze, this fund posted better returns in 2020 than the funds above, losing 3.4%, beating both the benchmark FTSE All Share and the Morningstar UK Flex-Cap category. The fund has a growth bias under manager Chris St John, who took over from Nigel Thomas in 2019 and looks for companies, particularly disruptive ones, that can deliver strong earnings growth over a three and five-year time periods.
Half of the portfolio is focused on FTSE 100 companies, but there is a diverse set of opportunities, with no reliance on one theme or stock, according to Morningstar’s Miller. Recent stock of the week and drinks maker Diageo (DGE) is the top holding, with the number two and three slots taken by pharma leaders AstraZeneca (AZN) and Glaxo.
BlackRock UK Special Situations
With a Silver Rating, the fund has returned nearly 12% annualised over five years and more than 7% over a 10-year period. Morningstar analyst Khizou says the fund has a bigger allocation to small-caps than the FTSE AllShare and rival funds. Manager Roland Arnold, who became sole manager of the fund in June 2019, “practices a bottom-up approach, targeting quality growth firms that are undervalued relative to their growth potential”, she says.
Top holding Royal Dutch Shell (RDSB) had a turbulent year as the oil price slump and a dividend cut hit the shares hard, but the recent recovery in the oil price has improved the outlook for the company. The fund’s portfolio also a 2.5% weighting towards Games Workshop (GAW), a FTSE 250 fantasy gaming retailer whose shares have soared nearly 2,000% in five years.
