Conditions in the UK stock market are about as tough as I can recall. But in a couple of years we will probably look back and marvel at what a great buying opportunity it was.
As of today, with bank shares in free fall, retailers on the ropes and shares in housebuilders down by as much as 90% from their peak levels, it looks like a mad time to buy.
But history tells us it is always at these times of maximum doom and gloom that you have to screw up your courage and buy. Usually, you look back and curse yourself for not having bought more.
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But what should you buy?
Over the past year, mining and resource stocks are the only ones that have gone up, and boy have they gone up, doubling, trebling or more over the past two years. But even the most gung-ho managers struggle to convince themselves that you should buy mining shares at their current levels.
So what do you buy? It depends what you’re looking for. If you want a steadily rising income, the UK Equity Income funds I reviewed in January are the place to be. They buy ‘defensive’ investments that are pretty sure to pay out bigger dividends almost every year - utilities, tobacco shares, supermarkets and the like.
But if you want maximum growth in your capital, you need to look at funds that adopt riskier strategies. The two main ones used by growth fund managers are concentrating capital into fewer shareholdings - as few as 30 compared with a typical equity income fund’s 100 or more - and much more active trading, which means being happy to take short-term profits rather than going for the long haul.
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Two funds get the chop
The trouble with this sector is that managers can have a great run and then lose the plot. An example is Ed Burke, manager of the Invesco Perpetual UK Aggressive fund until last week, when he quit.
Burke had a spectacularly good run while share prices were rising but since the bear market started his results have been dreadful. It’s easy to look like a genius in a bull market. This fund has been removed from our list since I have no confidence in the new manger of the fund.
Another fund getting the chop is Fidelity Special Situations. Here my reasoning is partly size. The fund now has £2,700 million invested. That means it simply cannot buy into smaller companies, yet this is where some of the best opportunities are now to be found. And I don’t think the current manager Sanjeev Shah will ever be as good as his predecessor Anthony Bolton.
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How our selected UK Growth funds have performed
| Fund | Six months* | One year* | Three years* | Five years* |
| Artemis UK Special Sits | -8.5% | -1.2% | +34.2% | +94.7% |
| AXA Framlington UK Select Opps | -2.8% | -4.0% | +41.2% | +126.7% |
| Fidelity Special Sits# | -5.2% | -8.9% | +25.8% | +105.3% |
| Invesco Perpetual UK Aggressive# | -15.9% | -20.3% | +23.0% | +94.8% |
| JPM UK Dynamic | -5.5% | -3.2% | +53.2% | +125.9% |
| UK All Companies Sector Average | -6.7% | -8.7% | +30.3% | +73.8% |
| FTSE 100 Index | -8.2% | -6.2% | +30.2% | +69.4% |
| BlackRock UK Dynamic ** | -0.2% | +6.1% | +53.9% | +130.3% |
| M & G Recovery ** | -1.2% | +0.5% | +57.1% | +125.4% |
* Including reinvested net income. Data to 9/6/2008. Source: Financial Express
# Removed from recommended list ** Added to recommended list
On the watchlist and under review
A fund that’s under review is Artemis Special Situations. As the table shows, the historic numbers are good, but over the past year manager Derek Stuart has been steadily losing ground compared with his rivals. In this case, I get the impression that he’s been doing the job too long. Anyway, unless returns pick up in the next six months this fund too is likely to be removed from our list.
Doing better has been JPM UK Dynamic, where Jonathan Ingram has avoided the banana peels despite having a lot of money invested in financial shares. I’m more and more impressed with the JP Morgan ‘team’ approach, where they do seem to benefit from having so many analysts and managers contributing to all their funds.
At AXA Framlington UK Select Opportunities, Nigel Thomas was one of the first to buy into the China story and the UK companies benefiting from it. He’s also avoided financial stocks and invested heavily in resources. I’m confident he’ll spot the next trend in the market ahead of most of his rivals.
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Two new boys on board
Two new funds are joining our list. One is a real old-timer, M&G Recovery, a 39-year-old fund which has been revitalised by manager Tom Dobell, a most untypical manager who graduated from agricultural college and spends his weekends on the family farm. Like other M&G managers, he takes a really long-term view and has held many of the shares in the fund’s portfolio for over three years. Today, virtually all the UK stock market is potentially in ‘recovery’ mode, which should be ideal conditions for Tom to do well.
BlackRock is the new name for Merrill Lynch’s fund management operation, and their UK Dynamic fund has an excellent record. Manager Mark Lytlleton has been in charge for 5 years and advisers have piled in with client’s money so that over £1,400 million is now invested. Lytlleton runs a concentrated portfolio of no more than 50 stocks, almost all large companies - he is just adept at picking the right ones.
These managers have very different personal styles, so over any period of 6 to 12 months one of them is likely to generate much higher returns than his rivals. But over a longer timescale of 5 years, I’d expect all of them to produce returns more like those in the table, where they’ve outperformed the FTSE 100 Index by 50-100%.
If you’re not sure whether you prefer the more dynamic and risky approach of UK Growth funds or the steadier ‘defensive’ approach of UK Equity Income funds, my advice is to play safe- put some money into each.
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Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
