Great British Bargains
More than five years after the Brexit referendum caused some investors to shun British shares, clouds of uncertainty - made worse by the coronavirus crisis - are beginning to clear. Takeover bids for the supermarket Morrisons, the infrastructure group John Laing, the inhaler-maker Vectura and the defence group Ultra Electronics - among others - show how international investors are identifying value in the UK.1
This trend also demonstrates what a wide variety of companies are listed on the London Stock Exchange (LSE), giving investors access to many different economic themes around the globe. For example, the six biggest businesses in the FTSE 100 index are - in descending order of size - the vaccines giant, AstraZeneca; the food and drink group, Unilever; the brewer and distiller, Diageo; the bank, HSBC; the pharmaceuticals group, GlaxoSmithKline; and the miner Rio Tinto.2
None of these businesses is wholly dependent on the UK economy. But all of them are subject to long-established laws and regulations intended to protect customers, employees and shareholders. Many of them are also paying increasing attention to environmental, social and governance (ESG) issues, bringing their businesses into line with the values and beliefs of a growing number of investors.
While American stock markets trade at or near all-time highs, Britain lags far behind. For example, America’s Dow Jones index soared by 92 per cent over the last five years while the FTSE 100 increased by less than 4 per cent. However, there was better news for British investors seeking income because dividends jumped by 61 per cent in the second quarter of 2021, compared to the year before
So investors in the UK today might buy bargains - especially if dividends continue to recover. But it is important to beware that dividends are not guaranteed and may be cut or cancelled without warning.
Diminishing risk by diversification
Diversification is a tried-and-tested way to manage risk. The principle is the same as not putting too many eggs in too few baskets. Pooled funds, such as investment trusts, automatically put this into effect by spreading individual investors’ money over dozens of different companies’ shares to reduce their exposure to the danger of setbacks or failure at any company. However, diversification does not guarantee investment returns and does not eliminate the risk of loss.
Several investment trusts focused on the British stock market have produced substantially higher returns and dividend income than the FTSE 100 index over the last year. Investors can take account of their own requirements for growth or income and consider whether investment trusts might meet their needs.
UK Equity Income
Inflation eroded the real value or purchasing power of money by 2 per cent in the year to July, according to the Consumer Prices index (CPI). But a professionally-managed portfolio of UK equities can preserve the real value of our savings and income when share prices and dividends rise.
Businesses that sell goods and services which people need or want to buy may be able to pass on rising costs to their customers in the form of rising retail prices. This can enable these companies to preserve profitability and shield their shareholders from the effects of inflation.
For example, several blue chips mentioned earlier - including AstraZeneca, GlaxoSmithKline and Rio Tinto - are among the top 10 holdings of JPMorgan Claverhouse Investment Trust plc (stock market ticker: JCH). For as long as people need medicines or industrial economies need iron ore for steel and copper for wind turbines, these companies are likely to remain in business.
According to Morningstar, JCH has delivered total returns over the last year, five-year and 10-year periods of 41 per cent, 60 per cent and 144 per cent respectively (to 31 July 2021)3 and, as of 6 September, had a yield of 4.1 per cent. It’s important to note, however, that past performance isn’t a predictor of current or future returns, and any income produced can vary over time.
UK All Companies
This sector covers a wide range of enterprises including more than 600 medium-sized and smaller businesses listed in the FTSE All-Companies index4. Some of these businesses make dividend income their priority, some seek capital growth and others a mixture of both.
Many of these companies are not yet household names but professional stock selection in this sector can give investors access to wealth creation in its early stages when both returns and risks may be higher.
For example, The Mercantile Investment Trust plc (MRC) seeks UK medium and smaller sized companies such as Bellway, which builds and sells homes; Games Workshop, the cult toymaker beloved by boys and girls of all ages; and Dunelm, the household goods group.
Again, while past performance isn’t a guarantee of future returns, MRC achieved total returns of 55 per cent, 95 per cent and 255 per cent over the three standard investment periods mentioned earlier5 and the current yield is 2.3 per cent.
Meanwhile JPMorgan Mid Cap Investment Trust plc (JMF) provides an opportunity to focus on medium-sized businesses such as specialist publisher, Future; the self-descriptive retailer Pets at Home; and the low-cost airline, Wizz Air.
JMF seeks growth and income throughout the economic cycle. While taking account of the performance warning above, JMF achieved total returns of 73 per cent, 88 per cent and 541 per cent over the three standard periods6, and currently yields 1.9 per cent.
UK Smaller Companies
Not every acorn grows into an oak. But small businesses can deliver big returns to investors who are willing to accept above average risk by getting in at - or near - the beginning of their corporate development.
In addition to the risk of capital loss, investors in this sector must also often accept lower dividends because growth - not income - is usually the priority. Professional stock selection can be particularly valuable in a sector where few companies are famous.
For example, JPMorgan Smaller Companies (JMI) aims to give investors access to innovative smaller businesses such as Ergomed, which tests and develops drugs for the pharmaceutical industry; Vistry Group, the housebuilder formerly known as Bovis Homes; and Halfords, the retailer of motor parts, bicycles and electric bikes.
JMI delivered total returns of 79 per cent, 205 per cent and 358 per cent over the three standard periods7 (past performance isn’t a guide to current or future performance) but its initial yield is currently only 1.2 per cent.
Conclusion
Investment trusts provide a tried-and-tested way to access the growth potential of the UK stock market. All of the trusts mentioned above have been listed on the LSE for more than 30 years and MRC was launched in 1884.
British shares have lagged behind overseas rivals recently but a trend is only a trend until it stops. ‘Buy low’ is often - but not always - the first step towards making a profit. While the future remains uncertain, dividends pay investors to be patient.
1 The Times: https://www.thetimes.co.uk/article/from-flutter-to-m-amp-g-spot-the-takeover-targets-qh6dcp6nm
2 The London Stock Exchange: https://www.londonstockexchange.com/indices/ftse-100/constituents/table
3 Quarterly rolling performance (%) as at 30/06/2021: 2016/17: 26.11%, 2017/18: 18.40%, 2018/19: -2.34%, 2019/20: -17.23%, 2020/21: 35.43. Benchmark: FTSE All-Share Index (£)
4 London Stock Exchange: https://www.londonstockexchange.com/indices/ftse-all-share
5 Quarterly rolling performance (%) as at 30/06/2021: 2016/17: 31.98%, 2017/18: 17.99%, 2018/19: -3.00%, 2019/20: -4.79%, 2020/21: 40.25. Benchmark: FTSE All-Share (ex FTSE 100, ex Inv Companies) Index (£)
6 Quarterly rolling performance (%) as at 30/06/2021: 2016/17: 23.43%, 2017/18: 27.39%, 2018/19: -11.44%, 2019/20: -15.02%, 2020/21: 65.12. Benchmark: FTSE 250 Index (ex. Investment Trusts) (£)
7 Quarterly rolling performance (%) as at 30/06/2021: 2016/17: 26.81% 2017/18: 36.47%, 2018/19: -3.90%, 2019/20: 2.13%, 2020/21: 83.50% Benchmark: Numis Smaller Companies plus AIM Index (ex. Investment Trusts) (£)
