How UK funds and trusts have fared since the last FTSE 100 record

The FTSE 100’s 7,900 points has surpassed the previous record set in May 2018.

A strong start to the year for the FTSE 100, rising 4%, pushed the UK’s blue-chip index to a record high at the end of last week.

The FTSE 100 now trades at around 7,900 points, ahead of the 7,877 points it hit in mid-May 2018. While headline returns are now flat over nearly five years, accounting for dividends someone who held a FTSE 100 tracker fund and reinvested any income payments would be sitting on around a 19% return.

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The FTSE 250, which is more heavily influenced by the domestic economy, is around 15% below its all-time high set in 2021.

The FTSE 100 has rallied due its high concentration in financials and commodity firms. The 25% invested in materials and energy stocks have benefited from higher commodity prices, while the 19% in financials benefit from higher interest rates. Consumer staples (18%) and healthcare (11%) have also been resilient during the economic turbulence of the past year. A weaker pound has also bolstered the overseas earnings of the UK’s largest stocks.

However, since the last FTSE 100 record, active fund managers have failed to return more than the index and investors would have been better off in a cheap tracker fund, such as the iShares Core FTSE 100 Ucits ETF or Vanguard FTSE 100 Ucits ETF. They cost 0.07% and 0.09% in fees and returned 18.9% and 18.8% since the May 2018 FTSE high point.

Data from FE fundinfo shows the average return from a UK All Companies fund over the same period was 11.3%, while the average return for a UK Equity Income fund was 14.4%, and a UK Smaller Companies fund was 9%.

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Over this period the top UK funds were Slater Recovery (51% return); Slater Artorius (50%); and Liontrust UK Micro Cap (49%).

The worst UK funds were abrdn Income Focus (-29%), which is the former LF Woodford Income Focus fund, followed by MI Sterling Select Companies (-27.5%) and Jupiter UK Mid Cap (-26%).

Investment trusts also struggled to return more than a simple FTSE 100 tracker. The average return for trusts in the UK All Companies sector was 7% and 15.5% in the UK Equity Income sector. The UK Smaller Companies Sector returned more than a FTSE 100 tracker, at 20%.

The top trusts were Rockwood Strategic (155% gain); Law Debenture Corporation (78.5%); and Merchants Trust (67%)

The bottom three were Chelverton Growth Trust (-54%); Worsley Investors (-47%); and Crystal Amber (-30%).

Investment trusts are more volatile than funds as their share prices can diverge from the underlying value of their investments, creating premiums or discounts.

Will UK shares keep rising?

The current macroeconomic environment of high inflation and interest rates should continue to support the UK stock market, professional investors believe.

Mark Barnett, fund manager at Tellworth Investments, says: “Commodities, banks, pharmaceuticals, with strong cashflow and decent dividends didn’t entirely fit the bill in the era of low inflation and negative bond yields.

“The current macro-economic environment of higher inflation and rising interest rates suits these types of businesses where tangible free cash flow and dividends are available to shareholders in the immediate future.”

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He says that despite the recent rally, UK shares are still cheap as there is negative sentiment towards the UK market internationally because of Brexit.

“This positive backdrop is likely to persist as long as financial conditions continue to normalise, moving away from the abnormal policy settings that have persisted since the financial crisis,” Barnett said.

Ken Wotton, manager of Strategic Equity Capital, a smaller companies investment trust, says that small and mid-sized companies will drive UK shares higher because they trade at valuation discounts to similar large companies.

He adds: “By the end of 2022, British stocks were trading on a forward price-to-earnings ratio that valued the market nearly a third cheaper than global equities – the lowest relative price level I have seen over the course of my career. After a seven-year slide in relative valuations, UK equities have not looked so attractively priced compared to global markets at any time in the past 30 years.”