Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
A balanced stock market portfolio will include shares from a wide range of countries. This could be through a global fund, such as the L&G Global Equity Index fund from our Select 50 list of favourite funds.
But it only allocates 3.6% to UK shares. Some investors want more of their money in their home country, perhaps because its more familiar and easier to keep up with the latest developments. Active DIY investors may also increase allocation to some countries because they believe they are particularly cheap or have strong growth potential.
This article highlights issues for investors to consider, as well as highlighting funds from our Select 50 list and which funds have been best-selling funds in our ISAs and pension products.
- We explore more issues about investing in the UK here: Is it finally time to buy British?
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Is the UK cheap?
The British market has been cheap for a long while and it remains cheap. This view is based on various measures. The price-to-earnings ratio is one common gauge of value. It shows UK shares trading at 11.9 times forecast earnings. In contrast, Europe is on 13.9 and the US on 21, according to Goldman Sachs (as of 1 April). In other words, British shares were 43% cheaper than those in the US. The world average p/e is 18, according to MSCI, putting British shares at a 34% discount.
British shares have been cheap since the Brexit vote of 2016 and the gap with the US has only widened as its ‘Magnificent 7’ stocks - the likes of Nvidia, Tesla, Meta and Apple - have led a broader technology stock rally. Neither the UK nor Europe have been blessed with such dominant market leaders.
Another measure of value is income dividend yield. The UK offers a yield of 3.8%, far higher than America’s 1.2% and above the world average of 1.8%, (as of 1 April).
What else to consider?
Cheap markets are well and good, but they need a trigger to revalue. Corporate activity could be helpful - there’s been a rise in private equity firms and other foreign businesses recognising value and buying out UK companies. British mergers and acquisitions were worth around $177 billion last year compared with $99 billion in 2023, according to Bloomberg.
The impact of US tariffs on the UK remain unknown but the UK may yet negotiate some advantage over other countries or may find it can increase trade with countries facing high US tariffs. These are big unknowns.
Investors should note that investing in the FTSE 100 is, to some degree, to invest internationally. Many of the biggest London-listed companies have broad global footprints, such as BP and GlaxoSmithKline. The FTSE 250, in contrast, gives more of a domestic exposure. More is explained here: What is the FTSE 250?
The big caveat is that markets can remain cheap for extended periods requiring patience from investors. But at least you can collect a decent income yield while you wait.
Economic factors
Some near-term positives for the UK economy are that inflation figures have been coming in lower than expected, at 2.6% for March. It means the Bank of England may be more inclined to cut rates, which would boost the economy and may support share prices. Read our regularly updated guide to rates: how far will interest rates fall?
Further to this, the government hopes investment in infrastructure, such as airport expansion, and the diversion of foreign aid money into defence will help boost economic growth.
How much of a portfolio should be in the UK?
The British stock market may be good value, but an allocation should remain modest for those wanting to retain a balanced and diversified portfolio. As mentioned, the typical global index fund, a common holding in many portfolios, only has a 3.6% allocation to the UK. Things were different a generation ago. Back in the 2000s, it was more common for investors to have a ‘home bias’, and with financial advisers warning of the risk of this - investors might miss out on the growth of faster growing markets.
It is worth considering currency risk. If you invest in standard US funds, your returns will be dictated by the progress of the stock market but also any swing between the pound and the dollar. If in doubt about investment choices, speak to a financial adviser.
UK fund ideas
Deciding where best to invest in the UK can be a challenge, given the vast array of funds, investment trusts and ETFs currently available. Fidelity’s Select 50 contains a manageable list of five favourite UK funds, each designed to produce growth or an income or a combination of the two. It encompasses both actively managed and tracker portfolios.
Here, we have pulled together a summary of the Select 50 views, as well as yields and costs, all correct at time of publication. The income yields are not guaranteed.
- The FTF Martin Currie UK Equity Income Fund is one of three actively managed UK funds on the Select 50 list. Managed by Ben Russon, Will Bradwell and Joanne Rands out of Leeds, this fund aims to generate a higher income than the FTSE All-Share Index plus investment growth over a three to five-year period after fees and costs. It pays a quarterly dividend and currently yields approximately 4.6%, an amount that is not guaranteed. Its holdings include some of the UK’s largest dividend payers, including Unilever, Shell and AstraZeneca, as well as some mid-cap companies. It has an ongoing charge of 0.52%.
- The Fidelity Special Situations Fund, run by Alex Wright, takes a contrarian approach and focuses on underappreciated companies. Owing to this, it offers an exposure to companies often not covered by other popular UK funds. Currently consisting of 125 holdings, the fund’s largest exposure is to financials, led by holdings in Standard Chartered and AIB Group (Allied Irish Banks). Some defensive stocks are also considered to be good value and Imperial Brands is now the second largest holding. It has a historic yield of 1.64% and an ongoing charge of 0.92%
- The Liontrust UK Growth Fund invests primarily in companies listed in the UK, although it may invest smaller amounts into companies listed outside the UK too. The fund's approach has a 'quality' bias, leading it to buy companies that tend to be more expensive than others but with the potential to continue growing quickly. The historic yield has been lower than the other funds at 2.1% and it has an ongoing charge of 0.83%. This approach blends well with a 'value' fund such as Fidelity Special Situations.
- The iShares Core FTSE 100 UCITS ETF is a passive fund, also known as an index tracker. It holds the individual constituents of the FTSE 100 in the correct amounts to track the index. Fidelity’s experts note that BlackRock is a seasoned investor in passive funds and that this fund’s cost are low. As such, it may suit cost-conscious investors with a longer time horizon. The yield is 3.5% and the ongoing charge is 0.1%.
- The Vanguard FTSE 250 ETF is an index-tracking fund which invests in mid-sized companies listed in the UK. Vanguard is an expert in index tracking and this fund is well priced. It is focused on mid-sized companies and represents a sensible choice on the riskier side of a portfolio. Mid-sized companies can be more volatile and riskier than their larger counterparts. The yield is 3.6% and the ongoing charge is 0.1%.
- More on the Select 50: our favourite funds - selected by experts.
Which UK funds have been best sellers on the Fidelity platform?
Two UK funds made the top 10 of best-selling funds in March - the Fidelity Index UK fund at 7th and the Legal & General UK Index Trust at 8th. The L&G fund also ranked 6th in the best sellers of 2024. Both funds track the FTSE All-Share, which captures a much broader set of British companies than the FTSE 100 or FTSE 250.
How to invest
Any of these funds can be held in an ISA or in our personal pension, also known as a SIPP. Or in the junior versions of these account. Here’s some links to helpful information:
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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