Investing in the UK stock market isn’t just about broadening the pool of people to help fund UK company growth plans, it’s also about building personal wealth. The UK has been a more fruitful place to make money than its unloved reputation would suggest.
Over the past 10 years, an investment in the broader UK market would have generated nearly seven times as much as cash in the bank. That’s illustrated by a 139% return from the FTSE All-Share index, which is a benchmark for the UK stock market, versus 20% from cash (see table below).
That’s a compelling reason itself to consider investing, particularly for those able to put money away for the long term. However, analysis of past performance trends shows investors could have made even bigger gains by picking UK funds with a track record of outperformance.
AJ Bell has identified a group of UK funds and investment trusts that have beaten the broader UK stock market by some distance. There’s no guarantee these names will continue to smash the ball out of the park, yet their success over a long period suggests they’re not just lucky. They’ve hit upon a formula that works, and patience has yielded big rewards.
AJ Bell analysed the total returns from all types of UK funds and investment trusts, namely those investing in large, medium and small companies as well as ones that put money into dividend-paying stocks. Total return captures both share price gains (and losses) and any income paid out by the investments.
Artemis SmartGarp UK Equity
Looking at open-ended funds, not investment trusts, Artemis SmartGarp UK Equity is the top performer on both a five and 10-year basis, a striking example of what’s possible with investing when you get it right. The fund uses an in-house software tool that scans for companies growing faster than the market but which have lower valuations than the market average. The purpose is to find names that are delivering good news but look cheap relative to the opportunity on offer. The managers analyse each name on the longlist to make the final selection.
The portfolio currently includes pharmaceutical group GSK, vaping and tobacco provider Imperial Brands and British Airways owner International Consolidated Airlines.
Someone who put £1,000 into an ISA on 6 April (the start of the new tax year) every year for the past 10 years and immediately invested in Artemis SmartGarp UK would now have a pot worth £23,674*.
It’s fair that some people won’t have £1,000 a year to put away. Fortunately, you don’t have to be rich to invest. In fact, you can invest from as little as £25 a month and still enjoy the benefits of investing down the line.
Not for you? More top performers
Dimensional UK Value does what it says on the tin. It invests in UK companies that have attractive valuations – and this investment process has worked wonders for the fund over the longer term. The fund benchmarks itself against the MSCI UK IMI Index and it has outperformed in seven out of the past 10 calendar years. The portfolio features lots of banks, tobacco companies and miners.
Invesco UK Opportunities is another a value-style fund. It has a concentrated portfolio, which means it has fewer holdings than a typical fund. The managers focus on their best ideas and would rather hold 35 to 45 stocks and show conviction in these names than spread the money across 100+ companies. It has recently shown a preference for large-cap utility providers, consumer staples and healthcare stocks.
Other notable names on the top performers list include small cap-focused investment trust Rockwood Strategic, which looks for undervalued companies that are either misunderstood, or experiencing a brief setback and which have turnaround potential.
There is a passive fund on the five-year list – Vanguard FTSE UK Equity Income Index. It has outperformed the FTSE All-Share index, albeit that’s not the underlying index the fund is tracking. Instead, this fund tracks an index (the FTSE UK Equity Income Index) that takes the UK market as the starting point and then strips out investment trusts and companies that do not pay a dividend.
The remaining stocks are ranked by 12-month forward dividend yield and weighted by market value. Think of it as putting a dividend spin on the biggest companies on the UK stock market and ignoring those that invest in other companies or property. Though note this is the ‘Acc’ version of the fund which automatically reinvests any income rather than paying it out.
What’s interesting is how an income fund ranks among the top performers for the UK market. A lot of people think income-style investments lack excitement compared to the fast growth you might get with tech stocks. What’s underappreciated is the power of compounding – reinvesting dividends over a 10-year period is key. It makes for a compelling case that slow and steady wins the race.
*Source: FE Analytics, not including trading or platform fees
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
