The UK’s referendum on its EU membership was a watershed moment socially, politically, economically and financially with the effects still being felt five years on.
The vote to leave the EU, known as ‘Brexit’, had a widespread and immediate impact. For the UK market, it triggered years of unpopularity with international investors who avoided the asset class due to the uncertainty the vote created. This was later worsened by the Covid-19 pandemic, which put extra strain on UK equities.
FTSE 100 and FTSE All Share one week after Brexit vote
Source: FE Analytics
While the initial Brexit vote was five years ago, a ‘resolution’ was only just achieved in late 2020 when a trade deal was finally agreed.
The deal came as the market shifted into value thanks to the rollout of several effective Covid-19 vaccines, ushering in a period of ‘recovery’ in markets which typically favours value assets. This was something the UK greatly benefitted from as its market is dominated by ‘classic’ value sectors like oil, commodities and energy.
FTSE 100 and FTSE All Share since Brexit vote
Source: FE Analytics
Richard Hunter, head of markets for interactive investor, said: “For the majority of those five years, the Brexit clouds hung heavily on the UK markets.”
Hunter added that with an agreed trade deal and successful rollout of its Covid-19 vaccine programme, the UK has regained popularity with the absent overseas investors.
“With the picture having cleared significantly since the exit was finalised, the UK is on a much more even keel. Both the FTSE 100 and FTSE 250 are ahead 11 per cent in the year to date and in striking distance of the major US indices, where the Dow has added 12 per cent and the S&P 500 13 per cent in 2021, with both nearing record highs,” he said.
“As with the US, the UK is seeing the benefit of a successful vaccination programme, the accelerating release of pent-up demand and an extremely accommodative stance from the central bank. Alongside warming international sentiment towards the UK as an investment destination on valuation grounds, it is possible that the tide is at last turning for the beleaguered UK indices.”
Below, Trustnet looks at the three main IA UK equity sectors – IA UK All Companies, IA UK Smaller Companies and IA UK Equity Income – and sees which funds have performed the best, and worst, since the Brexit vote.
Source: FE Analytics
Topping the table overall is IA UK Smaller Companies member Thesis Stonehage Fleming AIM. It was previously known as the TM Cavendish AIM fund.
Holding an FE fundinfo Crown rating of four, the £133.8m fund invests exclusively in equities on the UK Alternative Investment Market (AIM). Companies such as Totally, Venture Life Group and Advanced Medical Solutions feature in the fund’s top 10.
The AIM market is currently going through a wave of new additions, with more new joiners to the market in the first five months of 2021 than the whole of 2020.
Run by Paul Mumford and Nick Burchett, Thesis Stonehage Fleming AIM has made a total return of 223.86 per cent since the Brexit vote.
The next best performing IA UK Smaller Companies fund on the list was the third best performer overall, the Marlborough Nano Cap Growth fund. It made a total return of 200.30 per cent.
The four FE fundinfo Crown-rated fund is run by Guy Feld and Eustace Santa Barbara. The pair also run the Marlborough Special Situations fund, which has been another strong performer for investors during this period.
In fact, small- and mid-cap strategies dominated the top end of the table, something which Dzmitry Lipski head of funds research at interactive investor, noted: “The UK & EU Brexit trade deal and the rapid vaccine roll out have changed the fortunes for the UK market.
“With economic forecasts of the UK economy being revised up, it is no surprised that funds investing in mid- and small-caps are doing well. To me (and I may be wrong!), they are in prime position to benefit from one of the most attractive growth outlooks for the UK market in decades.
“Over the past couple of months, we’ve witnessed renewed appetite to the UK market, with UK options creeping back into the top 10 fund bestsellers.
“The UK market is brimming with opportunity, with cyclical stocks, which the UK market has plenty of, expected to perform well. However, it is important to remember that investment trends do not dominate in perpetuity. The key, as always when investing for the long term, is portfolio diversification - investing in a range of different securities, asset classes and sectors, thereby minimising your overall level of risk and helps to fortify your portfolio against Brexit level events.”
One IA UK All Companies fund breaking up the top of the performance table was £1.5bn MI Chelverton UK Equity Growth fund (although this does also have a focus on smaller companies).
The five FE fundinfo Crown-rated fund is managed by James Baker and Edward Booth. Although a growth focused strategy, the managers have been mindful of not being left behind during the value rotation, decreasing its exposure to expensive tech stocks earlier this year.
Other notable funds featured at the top of the table are Slater Recovery, Liontrust UK Smaller Companies, Premier Miton UK Smaller Companies, Octopus UK Micro Cap Growth and JPM UK Smaller Companies.
Source: FE Analytics
Moving to the worst performers and the bottom end of the table is notably dominated by IA UK Equity Income funds.
The UK equity income space was hit extremely hard by the financial and economic effects of the pandemic as companies had to cut or reduce dividends to support balance sheets. Prior to this, the UK market had been a thriving hub for global income investors. The underperformance shown here is indicative of just how significant the pandemic was on long-term performance.
The worst performing IA UK Equity Income fund was the ASI UK Income Unconstrained Equity, which made 15.47 per cent.
Manager Thomas Moore puts stock selection at the centre of his investment process, looking for companies where the management have a different view of the company’s economic prospects than the market, and align with Moore’s views on where the business can go.
It currently has a dividend yield of 3.49 per cent.
But overall the worst UK equity fund was the £3.2bn Invesco UK Equity High Income (UK) losing 6.69 per cent. Second was the £1.4bn Invesco UK Equity Income fund, which lost 4.58 per cent. Both funds are managed by Ciaran Mallon and James Goldstone.
In the latest fund update they said that the economic picture was now more optimistic than previously expected due to the UK’s stronger growth.
Both funds hold popular UK names top 10, such as BP, National Grid, Next and British American Tobacco.
Other underperforming funds since Brexit include Jupiter UK Growth, Premier Miton Monthly Income, Janus Henderson UK Equity Income & Growth and Waverton UK.