Investing in the UK: one market, three distinct approaches
British investors face an unusually tricky outlook as 2017 gets under way.
05 Apr 2017
Unstructured Learning Time
British investors face an unusually tricky outlook as 2017 gets under way. The prospect of Brexit is drawing nearer but the signals coming from UK businesses are mixed: the CBI’s Growth Indicator survey shows confidence remains strong
whilst 58% of CEOs from the UK’s 500 largest companies told an Ipsos/Mori survey that the Brexit vote was already having a negative impact on their business1, although 96% were confident their company could adapt to life outside the European Union².
Whilst uncertainties remain, we continue to see
strong investment opportunities in the UK and have the experience to navigate these markets.
Why investors like the UK stockmarket
Investors value UK-listed companies for their potential to increase their capital value and their commitment to paying out an attractive dividend income. Many of the companies listed in London are also active in numerous foreign markets,
allowing their investors to also gain wider international exposure. As a result, the UK stockmarket contains an unusually international mix of businesses – the largest companies, which make up the FTSE 100, earn around three-quarters of their revenues outside the UK. Companies in the next-largest group, which
make up the FTSE 250 Index, are more concentrated on the UK but still earn
a significant amount of their revenue from outside the UK.
Our three ways to play the UK
We have three investment trusts that concentrate on different aspects of the UK stockmarket, each led by highly experienced managers with strong views on where to find the best opportunities.
Schroder Income Growth Fund plc:
Schroder Income Growth Fund aims to provide an income that rises faster than inflation by identifying larger companies capable of sustaining strong earnings and dividend growth. Its holdings are mainly focused on the FTSE 100 although it also invests in FTSE 250 companies and is allowed to invest a proportion of its money in overseas companies. This diversifies risk and lets investors gain access to dividend income from companies and sectors that are not well represented in the UK market. The fund has increased its dividend every
year for the past 21 years and its inflation-beating credentials are strong: the 10.6p payout for 2016 was 66% higher than it would have been if the fund’s dividend had risen only in line with inflation since 1996³. It’s important to note that investing overseas does expose the fund to the effects of fluctuation in exchange rates and that past performance is not a guide to future performance
and may not be repeated.
Schroder UK Mid Cap Fund plc:
Our Mid Cap Fund specialises in the companies that make up the FTSE 250. These are generally more focused on the UK than many of their larger counterparts, although a significant proportion do generate substantial amount of sales outside the UK. The Mid Cap index also allows us broader access to a range of sectors that are not so well represented in the FTSE 100. Companies that we target have strong positions in industries with long-term growth potential,solid pricing power and high quality management teams. It is important to note that investments in smaller companies can be less liquid
than investments in larger companies and price swings may therefore be greater than in larger company funds.
Schroder UK Growth Fund plc:
Finally, our UK Growth Fund looks for stocks that are attractively and assesses the relative quality, structural growth potential and how sensitive they are
to the effects of the wider economy. The belief is that valuation is the key determinant of future returns: high valuations are often accompanied by higher
growth expectations, resulting in a higher probability of an unsuccessful investment. The investment approach forces a constant re-evaluation of where
the best combination of value and quality lies in the market. The Manager looks to avoid picking stocks that appear cheap but show little promise for the
future. We apply this approach mainly to companies listed in the FTSE 100 and FTSE 250 indices, with a portfolio typically composed of 40-60 stocks.
The benefits that investment trusts bring
Unlike a unit trust, which must sell its holdings if an investor withdraws their money, investment trusts issue shares so have a fixed pool of capital. This allows the fund managers to make long-term investment decisions as they don’t have to worry about outflows. In addition, investment trusts are also allowed to borrow money to invest to increase their exposure to attractive investment
opportunities without having to sell their existing holdings. They are also allowed to maintain a revenue reserve that can be used to top up dividend payments during difficult times which is a useful feature for income seeking investors.
The UK is going to remain a very important stockmarket for the vast majority of UK investors but there are likely to be short-term bumps in the road as well as great opportunities. This is why we believe experienced managers employing a range of approaches will continue to provide the best way to navigate uncertain times.
Source: Schroders, bid to bid price with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP, as at 31 December 2016. ¹In April 2011, the FTSE 250 ex Investment Trusts replaced the FTSE All-Share ex ITs ex FTSE 100 TR. The full track record of the previous Index has been kept and chainlinked to the new one +FTSE 250 (ex Investment Trusts) total return. ²FTSE All Share total return.
What are the risks?
− Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them can go down as well as up and investors might not get back the amount originally invested.
− Trusts that invest in a smaller number of stocks carry more risk than funds spread across a larger number of companies.
− The trusts will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions.
− As a result of the fees and finance costs being charged partially to capital, the distributable income of the trust may be higher, but the capital value of the trust may be eroded.
− The trusts may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments
purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
Important Information: ¹Source: CBI as at 29 January 2017. ²Source: IPOS Mori as at 5 February 2017. ³Source: Schroders as at August 2016. The views and opinions contained herein are those of Schroders. They may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds and are subject to change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. For investment advice, speak to your Financial Adviser. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. The most up to date Key Features Documents, available at www.schroders.co.uk/investor or on request. Issued in March 2017 by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority. UK11686. RC61516