The domestic-facing funds which outperformed during the UK’s wilderness years
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The FTSE 100 has been enjoying a recent revival versus its S&P 500 counterpart in the first sustained rally since the 2007/8 financial crisis. Much to the joy of those looking around for some non-US equity options.
While US stocks have still largely outperformed their UK counterparts, the gap is much smaller than it was.
A mixture of global market dynamics and UK-specific events saw UK stocks perpetually unloved by international and even domestic investors for much of the last decade.
Beyond Brexit, a revolving door of prime ministers and chancellors created an unsteady backdrop for the UK equity market which was put on a major discount for the US. That gap still exists, and is also a function of the more tech-focused growth names which dominate Wall Street, with the FTSE 100 trading on 13.1 times the next 12 month’s forecast earnings, a sizeable discount to the S&P 500’s 20.8-times rating.
Battling big outflows
Data from funds network Calastone’s shows £9.55 billion was withdrawn from UK-focused equity funds in 2025. This marked the 10th consecutive year of outflows with total outflows over the decade hitting £54.3 billion.
But some funds with a UK focus have managed to perform well despite these headwinds, among them investment trust Rockwood Strategic.
“There’s been so much going on externally that you can always find a reason not to invest,” says manager Richard Staveley.
Noise is one thing investors are always told to ignore, and for those dedicated to UK stocks, the past 10 years have been a real test of this skill.
Staveley’s trust was the only member of its IT UK Small-Cap universe to have delivered top quartile returns over both 10 and five years, making it part of the 10% of UK focused funds which have beaten their peer average and performance benchmark during those periods.
How each one did it varies but a common thread many of the managers point to is the stock picking discipline they’d applied across the years.
“What a lot of investors have told me is that they’re interested in good old fashioned stock picking. Someone with a bit of cajónes that isn’t buying next year’s nonsense drama but actually buying businesses that are real and is very focused on it,” says Staveley.
Investing in banks during a decade of growth
The UK is broadly characterised as a more cyclical market, made up of banks and energy stocks which are good for people seeking dividends but not so ideal when growth stocks are in vogue. And for several years, even the UK managers weren’t buying the banks.
The City of London investment trust, one of the largest of the UK Equity Income portfolios with almost £3 billion in assets under management, was one of the 33 names with top quartile returns over 10 and five years.
Up until three years ago it’d been underweight the banking sector as it “tends to have a defensive bias” manager Job Curtis explains, and in the aftermath of the financial crisis the banks were – to put it mildly – not in great shape.
But back in 2023 when interest rates began to rise for the first time since the crash, one of City’s analysts flagged that banks’ “structural hedge was being underestimated by the market”, Curtis said, creating a “very favorable tailwind” for the likes of NatWest and HSBC, both of which are in the trust’s top ten.
Since then, both stocks have made more than three times the FTSE 100’s 46% total return, but “banks were trading at discounts and tangible book value which shows the markets dim view of their prospects”, Curtis says.
It wasn’t just the interest rate environment swinging back in banks’ favour Curtis explained. In the years since the credit crunch banks had rebuilt their capital, and the regulatory environment has reassured investors’ faith in them.
How value investors have dealt with the defence rally
Defence companies have been increasingly popular with investors in recent years, sparked by Russia’s invasion of Ukraine, changes in US defence policy which are forcing European countries to up their military spend and broader geopolitical tensions.
After a stellar run, defence stocks suffered the largest fall in five years at the end of April, with a near 10% share price decline amid questions over manufacturers keeping pace with demand flared up.
Fidelity Special Situations and Fidelity Special Values are run by Alex Wright and Jonathan Winton, and the latter says that since he joined the management team in 2015 “we’ve probably invested in pretty much every defence company in the UK”.
Ultra Electronics, Meggitt, Chemring and more recently Babcock, have all featured in the trusts, but the team’s process is to look at companies “when they are out of fashion, which [for defence] was a few years ago,” Winton says.
When an area like defence suddenly captures the market’s attention Winton says this means the sell discipline is put to work given the trust’s status as a value investor which looks to recycle its earnings into new ideas and buy into early-stage turnarounds.
Winton adds: “There’s always a real risk of selling too early and leaving something on the table. That’s just what ends up making you a bit more comfortable as a value investor and sticking to your philosophy and process.”
Some of these names have been exited, while others have been taken over and left the stock market, Babcock, Rolls-Royce and Serco remain constituents of the portfolio.
The AJ Bell Investments team has both products on their Favourite funds list, partly because of this dedicated contrarian approach.
“[They] look for overlooked or unloved companies with a catalyst for change that hasn’t been factored in by the market,” AJ Bell wrote.
Taking advantage of the moment
Along with some UK-specific sources of market worry since 2016, the Covid-19 pandemic and the global shutdown sent global markets into one of the biggest tailspins on record.
Nick Purves, one of the two managers of Temple Bar trust, says that the pandemic was a key buying opportunity for value investors like himself as equities across the board took a hit. But just because a company’s valuation takes a hit, that doesn’t mean it becomes a value stock, he explains.
On the flipside Temple Bar’s fellow manager Ian Lance has spoken a lot about not allowing ‘style drift’ when stocks are in soaraway mode and when bumper returns could tempt investors away from their rules.
“So much money in the market today is not invested in fundamentals or cash flow; it’s passively invested on a short-term investment basis. And that should increase the opportunity for those who continue to focus on the fundamentals,” Purves says.
Eve Maddock-Jones: Funds and Investment Trust Writer
Eve joined AJ Bell in 2026 as a funds and investment trust writer. She was previously editor at Investment Week, reporting on all major retail investor news, covering funds and investment trusts, ETFs and regulation...
