The FTSE 100 Index of the UK’s biggest companies hit 6,865 at the end of February, within a whisker of its all-time high of 6,930. Despite a wobble amid Ukraine turmoil and China’s slowdown, experts remain optimistic that it will soar to new heights this year. But is it too late to take advantage of opportunities on home soil with this year’s Isa allowance?
According to experts, definitely not. “There is plenty of room for further gains as economic recovery gathers pace,” says Adrian Lowcock from fund adviser Hargreaves Lansdown. “The upturn will boost company earnings, and in turn, profits – and this trend will make the UK market increasingly attractive for investors,” he says.
Unlike when the FTSE soared to its previous peak in 1999, the profits that Britain’s blue chips are currently making leave room for growth. Back then, the typical large company was worth 30 times more than its earning each year.
Today, that figure is around 13. Scott Gallacher, from independent financial adviser Rowley Turton, says: “The UK market is still cheap, offering very good value compared with other assets such as cash, gold and fixed income.”
Risks remain – global economic jitters could hit the UK recovery and some advisers fear rising interest rates.
However, many analysts remain excited about the prospects for the rest of this year. For example, Citibank predicts that the FTSE 100 Index will rise to 7,500 by the middle of the year, and end the year at around 8,000. Goldman Sachs, though a little more conservative, still predicts a year-end value of 7,200.
Large companies doing well include retailers such as Next and Sports Direct, which have benefited from the recovery in consumer spending. Leisure sector companies such as Whitbread are up for similar reasons, while housebuilders such as Persimmon have also boasted strong gains thanks to the strength of the property market.
However, investments in the FTSE 100 don’t limit your exposure to the UK. While the index includes more British companies today, with construction firms, retailers and the Royal Mail all joining over the past year, it is still full of global businesses such as banks and natural resources companies.
One recent study suggested 77% of FTSE 100 companies’ earnings came from overseas – a third of that came from emerging markets, where volatility remains high. That international exposure brings risks as well as opportunities. The crisis in Ukraine follows upheaval in other emerging markets – including the all-important Chinese economy, where concerns are growing.
Back home, it is actually the smallest British companies that have posted the strongest gains in recent times. The FTSE Small Cap Index rose by 29.6% in 2013, more than twice the 14.4% return achieved by the FTSE 100 Index. Over the past five years, small company shares are up by around 150%, compared with 80% or so for the blue chips.
So what is the wisest strategy for investors? The first point to make, stresses Jason Butler from IFA Bloomsbury Wealth, is that “all the evidence suggests trying to time investment markets is a fools’ errand”. One option is to drip-feed money into the market to smooth out volatility.
Also consider how you invest. For straightforward exposure to blue-chips, it may not be worth paying the higher charges levied by active managers when tracker funds, that simply mimic the performance of an index, are so much cheaper.
Research conducted by rPlan, the investment platform, suggests at least a third of active funds in the UK fail to match the long-term returns generated by low-cost trackers.
These funds can be super-cheap. HSBC FTSE 100 Index, for example, comes with an annual management fee of just 0.25% – and no other charges. At 0.3% a year, the Liontrust FTSE 100 tracker is almost as cheap. Both funds accept regular savings starting at £50 a month, or lump sums of £1,000 or more.
Nevertheless, plenty of active managers genuinely add value – and offer approaches to investing in the UK market that might not have occurred to many investors.
For example, Lowcock is a fan of Old Mutual UK Alpha, managed by Richard Buxton. “He has focused on a concentrated portfolio of reasonably valued larger and mid-sized companies with good growth potential and having performed well during a testing period for stock markets, this fund could make an excellent choice for investors in search of capital growth,” says Lowcock.
For more risk-averse investors, he suggests Artemis Income. “This invests in UK companies with strong balance sheets that are able to pay decent dividends, making sure they are likely to survive through any further tough times for the market.”
Managers Adrian Frost and Adrian Gosden have a track record of excellent stock picking skills. The fund’s performance has outstripped the FTSE All-Share Index since Frost joined Artemis in 2001.
Alternatively, for those who want continued exposure to smaller companies, Gallacher tips the PFS Chelverton Equity Income, which is unusual in investing at this end of the market in order to generate higher yields. It isn’t only aimed at investors seeking income, Gallacher points out, and “having delivered a total return of 261% over the past five years, it is definitely worth a look”.
Finally, Patrick Connolly, of independent financial adviser Chase de Vere, suggests special situations funds, which seek opportunities among companies that are undervalued for unusual reasons – they might be bouncing back from a crisis, for example, or likely to receive a takeover approach.
“In particular, we recommend Artemis UK Special Situations and Investec UK Special Situations,” he says.
Thinking globally
The UK market has provided stellar returns over the past year for investors. But there are plenty of global funds that enable you to dip your toe in developed and emerging markets which are worth considering for your Isa. Over the past five years the average global fund has returned around 97%, according to data anlalyst Morningstar. So what are some of the favoured funds to look for?
? M&G Global Dividend This is the most popular global fund, managed by Stuart Rhodes and wins the vote of Jason Modray from financial website Candid Money, with a yield of 3.1%. “It offers a sensible way to gain global exposure, with a bias towards the US, while enjoying a reasonable level of dividend income. If you don’t need the income, reinvesting it should help boost growth while reducing possible volatility, hence the fund could be a good diversifier alongside existing funds you might own.” However, Patrick Connolly from IFA Chase de Vere, adds: “The fund is a strong performer although it’s now nearly £9bn in size, which could limit the manager’s flexibility.”
? Rathbone Global Opportunities This fund, managed by James Thomson, favours small and mid-sized companies, mainly listed in Western markets – and this focus can make it turbulent. “But it also has a defensive bucket of stocks to help protect it more when markets are volatile,” says Darius McDermott from execution-only broker Chelsea Financial Services. Thomson has been running this fund for more than 10 years with a strong record of returns.
? Lindsell Train Global Equity Manager Nick Train avoids trying to predict wider economic conditions or changes in interest rates, focusing instead on finding strong businesses and holding on to them. “He is very much a stock picker looking for exceptional businesses around the world that will be around in 20 years’ time, and are able to offer consistent growth,” says Adrian Lowcock from Hargreaves Lansdown.
? Witan Investment Trust “It’s large, low-cost and truly global,” says Connolly. A well-diversified investment trust, launched in 1909, it appoints 12 different specialist managers to run different investment mandates. “Those managers that aren’t up to scratch are replaced, with each manager’s contract being subject to just one month’s notice,” he adds.