Three funds to play the UK stockmarket rally

25th February 2014

Hargreaves Lansdown’s senior investment manager Adrian Lowcock picks three funds to play the UK stockmarket’s current winning streak…

On Monday 24 February, FTSE 100 closed at 6,865, its highest level in 14 years.

The index is now up by almost 98% up since 3 March 2009, the market low in the wake of the financial crisis and the lowest point since March 2003 and today UK shares remain cheap despite the headline highs of the FTSE 100.

March 2009 was a depressing time for investors, with stock markets having lost nearly half their value since October 2007. Since then the rising tide has lifted all boats and equity investors who stuck with the markets have done well in total return terms. Small and mid-cap stocks have done particularly well, as have fund managers who successfully tilted their portfolios towards defensive companies when they needed to.

The all-time high of 6,930 for the FTSE 100 has been a ceiling on the index performance. A lot of fuss and attention is placed on the index value of the FTSE 100 and the index level is often used as a benchmark of investor confidence. However, it’s important to remember investors have also been benefitting from dividends and investors need to look at total returns, which include the effect of reinvesting dividends. The FTSE 100 index at 6,865 does not take into account dividends.

The FTSE 100, on a total return basis, recovered to its 1999 peak by February 2006. £10,000 invested in the FTSE 100 when the index was at 6,930 would be worth the same amount by February 2006 if dividends had been reinvested.

A more discerning approach could now be warranted – stock picking remains important and investors should remember the need for a balanced portfolio.

Old Mutual UK Alpha

In 2002 Richard Buxton made the bold claim that the stock market would make little progress over the next decade or so, but he could still perform well. He has achieved this by focusing on a concentrated portfolio of reasonably valued larger and mid-sized companies with good growth potential. This is an approach we like and it has worked well for Richard Buxton over the long term. Having outperformed in the past during a testing period for stock markets, he is optimistic about the future, and believes the next decade will be far better for investors than the last. I believe this fund could make an excellent choice for investors in search of capital growth.

Marlborough Multi-Cap Income

This fund offers the potential for strong capital appreciation traditionally associated with smaller company investing, with the additional attraction of equity income. Giles Hargreave and his team are among the UK’s best smaller companies investors, according to our analysis. The fund is diversified with over 100 holdings, and they actively manage the portfolio, adding to their winners and selling those failing to add value. The team targets companies yielding at least 2% but with the potential to grow their dividends over time. This fund can add diversification to a portfolio as it invests outside the UK’s largest companies, while offering an attractive yield of 3.76% to income-seeking investors.

AXA Framlington Managed Balanced

Few fund managers can match Richard Peirson’s long-term track record, yet he remains relatively unknown among investors. He tends to invest between 75% and 80% of the portfolio in shares, with the rest in cash and government bonds. The latter are used to provide balance to the equity holdings and reduce the volatility of the portfolio. Our analysis suggests good stock picking has been a key driver of performance, while Richard Peirson’s country and asset allocation decisions have also contributed. His ability to consistently add value has been key to his long-term success and this fund could suit investors seeking a core investment for their ISA.

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