Best funds and trusts for exposure to UK bargain shares

The UK stockmarket is loathed by domestic and international investors, but valuations look historically cheap. This panel of experts reveal their growth, income and wildcard tips to Kyle Caldwell and Fiona Hamilton.

Growth

Fidelity Special Situations

TR 1 year -4.5%, 3 years 23.3%, yield 1.7%

Value investor Alex Wright says attractive valuations can be found across the UK market, in large and small companies, both international and domestic-facing business. On a sector level he is favouring banks and oil. The value style has endured a miserable decade, but could well swing back into favour in 2019. But as Liontrust's John Husselbee notes:

"Investors should expect rather lumpy returns as the manager seeks under-owned and under-appreciated investment opportunities."

Fund factsheet: Fidelity Special Situations

BlackRock Smaller Companies Investment Trust (small cap)

SPTR 1 year -3.4%, 3 years 33.9%, discount -10.9%, yield 2.3%

None of our investment trust panellists put forward a UK-focused trust that invests across large, mid and small caps. Instead, specialist small-cap trusts were favoured, with the first being BlackRock Smaller Companies Trust (LSE:BRSC), which has outperformed its benchmark in every financial year since Mike Prentis became joint manager in 2002. Tim Cockerill likes its focus on quality businesses.

"Small caps have tended to provide stronger long-term growth than large caps, and who better to manage the trust than one of the UK's most experienced small-cap teams?" 

He says. (2019 Money Observer Rated Fund)

Fund factsheet: BlackRock Smaller Companies IT

JPMorgan Smaller Companies Investment Trust (small cap)

SPTR 1 year -2.4%, 3 years 12.7%, discount -13.8%, yield 13.4%

JPMorgan Smaller Companies (LSE:JMI)  tipped invests for growth predominantly among the constituents of the FTSE Small Cap index and AIM, with a relatively low exposure to mid-caps. Georgina Brittain has been manager since 1998, with Katen Patel joint manager since 2014. John Newlands:

"It has a solid track record, is not afraid to use gearing, has a decent forward dividend yield, and yet trades on a mid-teens discount. Despite Brexit-related nervousness, this looks an attractive prospective package." 

Fund factsheet: JPMorgan Smaller Companies IT

Income

Schroder Income Maximiser

TR 1 year 4.7%, 3 years 30.4%, yield 7.5%

With UK equity income funds typically yielding around the 4% to 4.5% mark, Schroder Income Maximiser offers an income kicker. In order to provide such a high yield the fund manager boosts the natural income by writing covered call options on the underlying stocks. In return, the fund receives a 'premium' (fee), which it then distributes to investors to boost income payments. Mick Gilligan at Killik is a fan of the strategy and recommends the accumulation share class in order to decrease risk.

"By opting for accumulation units, investors reduce volatility by compounding the high levels of income the strategy generates", he says. (2019 Money Observer Rated Fund)

Fund factsheet: Schroder Income Maximiser

Temple Bar Investment Trust

SPTR 1 year -3.4%, 3 years 23.8%, discount -5%, yield 3.7%

Temple Bar Investment Trust - Alastair Mundy has been manager since 2002 and is another recommended by our panellists who is committed to a value-oriented style. Mundy is preparing for a spike in volatility, which should in theory provide a tailwind as the value style tends to shine during market pullbacks. Sandy Cross says:

"The long-term record of value investing is outstanding, yet growth has proved the dominant style for nearly a decade. Alastair Mundy is an experienced investor and you are paid a good yield to wait and see if the market rotates this way." (2019 Money Observer Rated Fund)

Fund factsheet: Temple Bar IT

Wildcard

Woodford Patient Capital Trust

SPTR 1 year 3.7%, 3 years -13.8%, discount -13.3%, yield 0%

Despite some successes, Woodford Patient Capital Trust (LSE:WPCT) has struggled since its much-hyped 2015 launch, leaving those who invested on day one nursing paper losses of over 10%. Woodford invests in a concentrated portfolio of quoted and unquoted companies, with a focus on disruptive high-potential innovative businesses. Various experts, including Peter Hewitt, expect performance to pick up in 2019. Hewitt notes:

"It must be the most unloved trust there is, but I think a number of its holdings are turning the corner and it could do well regardless of the direction of the FTSE indices." (2019 Money Observer Rated Fund)

Fund factsheet: Woodford Patient Capital

GVQ UK Focus

TR 1 year -9.5%, 3 years 10.6%, yield 2.5%

A 'private equity lens' plays an important role in the investment style of GVQ UK Focus. For managers Jamie Seaton and Jeff Harris, it has been an important way to realise value at a time when UK equities are unpopular. Kelly Prior, investment manager at BMO, says:

"This is a very focused portfolio (of 24 holdings) that can be volatile short-term. The managers believe it offers excellent value after a tougher recent period."

Fund factsheet: GVQ UK Focus

Note: fund tips are shown in green and investment trust tips in blue. (SP)TR = (share price) total return.  All performance data Morningstar, as at 1 December 2018. 

See interactive investor's Super 60 funds here.

Our wildcard tips explained

This year we asked our experts for wildcard picks: out-of-favour funds where a catalyst for a change in fortunes is expected, making them value opportunities. Investment trust bargains can be spotted by assessing the discount relative to historic highs and lows. Picking open-ended fund bargains is more art than science.

Our fund and trust tips panels

Our fund experts:

Kelly Prior is an investment manager in BMO Global Asset Management's multimanager team. She joined the group from Thames River Capital in 2007.

Brian Dennehy is managing director at advisory firm Dennehy Weller. He also runs FundExpert, which provides research and insights for self-directed investors.

Mick Gilligan joined Killik & Co in 2001 and became a partner in 2004. He was previously an investment specialist at a private client advisory business.

Jason Broomer has more than two decades' experience in fund research. He runs Square Mile's portfolio service.

John Husselbee is head of the Liontrust multi-asset team. He has more than 25 years’ experience in managing multi-asset portfolios.

Ben Yearsley is a director at Shore Financial Planning. He was formerly head of investment research at Charles Stanley Direct.

Our trust experts:

Tim Cockerill is investment director at wealth manager Rowan Dartington, which is part of St James's Place. It is responsible for client assets in excess of £1.5 billion.

Sandy Cross is a partner at Rossie House Investment Management, which has long favoured investment trusts for private client portfolios. He joined RHIM in 2012.

John Newlands worked for nearly a decade as head of investment companies research at Brewin Dolphin. He is founder of Newlands Fund Research.

Peter Hewitt has managed the BMO (formerly F&C) Managed Portfolio trusts since 2008. He joined F&C in 1999.

Charles Murphy is head of listed investment companies analysis at Panmure Gordon, which he joined in November 2012.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.