After a dismal 2020, UK funds are among the best performing this year as the vaccine rollout, economic re-opening and value rally all work in their favour. Can this continue, and how can investors position for a strong recovery in the UK economy? We look at some funds to tap into this growth - and one "back-up" fund for a more subdued growth scenario.
Funds for a UK Recovery
Of all the 44 open-ended funds rated Gold by Morningstar analysts, the top performers this year are UK focused: Jupiter UK Special Situations is up by 17% year to date, closely followed by Fidelity Special Situations and Schroder Recovery, which are both up around 16%. The same trend is evident in funds rated Silver by Morningstar analysts, where Artemis UK Smaller Companies is the best performer with a gain of nearly 22%.
These funds all have a value investment style, one which has been out of favour for a number of years but has recently mounted a comeback. This could continue as the UK economy recovers; the Bank of England predicting growth of 7.5% this year, the highest since the 1940s. Morningstar's Dan Lefkovitz has recently examined whether the UK equity market, for many years unloved, has recently entered a "sweet spot".
Top Performing UK Funds Year to Date
Schroder Recovery
Morningstar analyst Samuel Meakin thinks Gold-rated Schroder Recovery is well-placed to benefit from strong economic growth. As the name suggests, the fund tries to identify distressed or unloved companies that could do well under more benign conditions.
The fund was down 11% in 2020 but has rallied so far this year. Meakin says: "The approach can lead to prolonged spells of underperformance when value investing is out of favour, but then with significant outperformance in more favourable environments, as we have seen since late last year following the vaccine announcements, continuing into this year as the domestic economic outlook has improved." Top holdings include oil giant BP (BP.) and Royal Mail (RMG), whose share prices have risen 26% and 54% this year respectively, as well as some of Britain's largest listed banks.
Jupiter Special Situations
Two special situations funds take up the number one and two positions in our table of top performing funds year to date. Special situations managers look for companies that are undergoing a turnaround that the market has failed to fully appreciate.
Jupiter Special Situations occupies the number one position, just ahead of Fidelity Special Situations, and both were among the worst perfoming of Morningstar’s highest-rated funds last year.
Managed by Ben Whitmore since 2006, the Jupiter fund is up 36% on the same period last year, comfortably beating the Morningstar UK-Large Cap Equity category and the FTSE AllShare benchmark. Morningstar analyst Robert Starkey says that Whitmore’s approach “reflects his genuinely contrarian and value-orientated investment philosophy”. The manager shows the courage of his convictions in building a portfolio that differs greatly from the index - and investing early in underappreciated UK companies. “He has proved an astute investor over time, with a clear ability to select stocks in a dispassionate and disciplined fashion,” Starkey says.
Top holdings include life insurer Aviva (AV.), oil major BP, and DIY company Kingfisher (KGF), which has benefited from a number of pandemic trends.
Fidelity Special Situations
In second place, Fidelity Special Situations has recently been upgraded by Morning analysts from Silver to Gold, along with its sister investment trust, Fidelity Special Values (FSV).
After upgrading the fund, Morningstar analyst Fatima Khizou praised manager Alex Wright’s experience, insight and approach to portfolio management: “Wright is a thoughtful investor whose knowledge of the portfolio, and insights at company and industry levels, add value to the approach.” He targets companies that have the potential to recover because of their unique business model, capacity to change and cheap valuations.
In a recent investor presentation, Wright said that despite the recent bounce and rotation back into value, UK equities remain undervalued and could rebound further this year. Top holdings in the fund include life insurers Legal & General (LGEN) and Aviva (AV.). These companies' business models proved resilient during the crisis but are still under-appreciated by the market, Wright said: “Life insurers offer attractive combination of cheap valuations, strong demand/supply fundamentals and growing earnings.”
Vanguard FTSE All Share Index
Even though active fund managers have prospered this year, three passive funds from Vanguard, L&G and iShares make it into the top 10 best performers list, each gaining more than 10% year to date. Vanguard FTSE All Share Index has a Gold Rating and is a strong passive option for UK equity investors, says analyst Dimitar Boyadzhiev. "Its portfolio is well-diversified and captures almost the entire opportunity set, making it a tough opponent to beat," he adds.
"With its 20%-25% allocation to mid- and small-cap stocks, it offers broader and more-diversified exposure than the better-known but mega-cap-heavy FTSE 100 Index," Boyadzhiev says. While the FTSE 100 is up around 7% in the year to date, the FTSE AllShare is just ahead with a gain of 8%, as smaller and medium-cap stocks tend to outperform in an economic recovery.
Trojan Income
What if things don't go according to plan? Morningstar's Meakin likes Silver-rated Trojan Income, where a focus on quality and defensive companies has helped the fund outperform its peers in weaker market environments such as in 2020. Meakin says the fund can underperform in market rallies because of its low weighting for cyclical stocks. The "fund's sturdy profile has served investors well" over the long-term, he adds.
The fund was down 9.5% in 2020, but this beat the FTSE All-Share and the average return in the Morningstar UK Equity Income category. This year, despite the fund being up nearly 4% in the year today, this has lagged the benchmark and Morningstar category. Top holdings include dividend stalwarts Diageo (DGE), Reckitt Benckiser (RKT) and Unilever (ULVR).
