The UK as an equity market has been overlooked for a number of years and over the last decade or so its importance in the global equity index is rapidly becoming an afterthought. We have previously written about the UK (as a market) having an allocation less than Apple (as a company). As recently as 2015, the UK accounted for approximately 8% of the World Index; today this number is closer to 4.00%. Over the same time frame, the US is over 2/3 of the index, up from 57%.
Maybe the weight of the UK market has fallen due to the component parts – the UK has a large exposure to “old” economy businesses – banks and oils – which are under lots of pressure when it comes to profits and lacks high growth (read “tech”) stocks. Maybe it has fallen due to political issues. Maybe the fall is down to other factors, such as a bias to stocks that pay dividends which might be out of favour. It could be down to uncertainty surrounding Brexit. Alternatively, it might be that c80% of earnings of the largest companies in the UK Index are from overseas sources and the weakness of Sterling has dampened profits too. I would imagine that there are a whole host of other factors, but it’s not surprising the UK has suffered.
But, even at 4% of the World Index, it is still one of the largest economies in the world. The UK can boast a large number of stocks that are global market leaders; it has a great legal system, is considered the global business language, is ideally situated globally from a time perspective through the use of GMT and arguably could be said to be business friendly, which could mean good investment potential.
When looking at statistics, the UK Equity Income sector – in many cases the default option when it comes to investing – has witnessed a huge amount of outflows over the years. This has, obviously, not been good – returns have not been great, and when considering income is under pressure, is it surprising that investors have avoided the sector. The sector hasn’t been helped either with the issues surrounding Neil Woodford’s fund being represented here too.
The chart below shows all funds in the universe and in reality, it doesn’t really make for good reading – both individually as well as collectively. To create the chart, we take data for a decade using rolling 365-day returns (updated weekly). If a fund hasn’t been live for a decade, then we just take the history from launch. The red bar highlights the range between the best 365-day period and the worst. Two extra points of note on the chart:
The Blue Diamond highlights the average return of the fund over the history
The Green Square highlights the most recent 365-day return number
As you will immediately see, most funds have their blue diamond below the long-term average. As you will also see, the green square is much closer to the bottom of the range. There are a few exceptions, but with a little investigation, these can be quickly explained away – such as how long the fund has been live, whether there has been changes of fund management, if the fund has changed sector and so on. So, looking at the chart below, it’s not really surprising that investors are leaving in their droves.
There are about 90 funds in the sector, and I wholeheartedly get the chart is not easy to read. The main point is to see the range, the average and where a fund sits today in that range. If you want to see this chart in better resolution, please do not hesitate to get in touch and we will very happily send it to you.
One thing you will notice by looking at this chart shows the range of returns, the average returns and the returns today are quite varied – suggesting the funds are not doing the same thing – the scope to add value certainly exists. Average returns – when casting your eye across the chart only looking at the blue diamonds suggests a 365-day return coming in around 10% - certainly not bad considering returns available from cash on deposit for instance. With “today’s” numbers typically ranging from -5% to -15% for the last year, it could be seen as a great opportunity to invest – most funds are above their absolute lows.
The second chart – once again using all funds in the sector, the same time frames, their range, the average and today’s standing. But, instead of using performance numbers, we are looking at volatility as measured by standard deviation of price movements (standard deviation). We are fully aware that volatility is only one measure of risk and should only be considered with other metrics, but when you look below, it does show an interesting chart.
Volatility is really high at the moment. Remember, the “today” number represents the volatility of the fund over the last 365 days though. It is fair to say there are a number of reasons why volatility is so high – Covid being a major contributor – but many of the factors mentioned earlier in this paper have added to this number too. Looking at the blue diamonds across the chart would suggest average volatility for the average fund is between 10 and 15, but the average “today” is between 25 and 30 – more than twice the long run average.
So, what can you take from these charts? Risks are up, returns are down… That doesn’t feel like a good recipe for investors and might well be a reason why flows are poor to the funds in the sector. Remember, these charts use rolling data and as market spikes tend to happen quickly, this impacts the range – both in terms of performance and volatility. Correspondingly, 52 weeks later, these spike just as quickly drop off. Maybe now might be the time to start looking at the sector again – after all, with low interest rates and inflation, and the economy starting to reawaken from the Covid crisis of earlier this year, it could work out to be a good diversifier, and who knows, in a few months’ time, the volatility might drop off and the returns improve.
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