If the UK is recovering, what funds should you be in?

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Signs that the UK economy could be on the brink of recovery have prompted interest in the country’s stockmarket – with advisers tipping funds from Investec, BlackRock, Liontrust and Threadneedle as possible plays on firms based on home shores.

Despite any recent wobbles in market volatility, economic indicators are pointing to a sustained UK recovery but while optimism grows Britain remains at the mercy of outside influence. 

Data released by the Organisation for Economic Co-operation and Development this week helped to further propel hopes that Britain’s economy is returning to steadier ground. The organisation’s leading indicator for the UK rose to 100.8 in April, a modest rise from the 100.7 notched up during both March and February, and the 100.6 recorded in January.

More significantly, the barometer has been steadily trending upwards since May last year and is now pointing to growth close to its trend rate. The OECD has not been the only entity which has been sharing good news. In fact the UK seems to be generally, if not completely, enjoying a spate of typically positive numbers.

Delivering his final inflation report last month, outgoing Bank of England governor Mervyn King for the first time since the onset of the financial crisis forecast better growth and lower inflation for the UK economy going forward.

Cynics might scoff that the observation was merely an attempt to put a better gloss on his term in office, which many regarded as less than successful, says Standard Life Investments senior international economist Douglas Roberts. However, he adds: “The fact, though, is that Sir Mervyn is not alone in seeing a brighter future for the UK economy.

“We are not talking of a possible early return to trend rates of growth but a pick-up in the pace of expansion that should banish any talk of renewed recession risks.”

Markit’s purchasing managers’ survey for the services sector revealed that activity hit a 14-month high in May, with the new business index at a 39-month high. The corresponding manufacturing survey indicated a second successive month of expansion with activity at a 15-month high while the construction survey showed the first growth, albeit modest, since last October.

For its part the British Retail Consortium declared retail sales jumped 3.4 per cent year-on-year in May. In addition, better numbers from car sales, house prices and employment have been fed through.

Economic consultancy IHS Global Insight has now upgraded its UK GDP forecasts from 0.8 per cent to 1 per cent this year and to 1.6 per cent, up from 1.4 per cent, for 2014.

IHS Global Insight chief UK & European economist Howard Archer says: “The recent improvement in a wide range of indicators suggest that the UK economy may finally be gradually moving to a firmer footing and it could be particularly significant that the improvement in the survey evidence for May occurred across a number of areas.”

While the stockmarket’s recent rally has hit a setback, with the FTSE 100 and FTSE All-Share each down 4 per cent over the past 30 days, over the past 12 months they have surged by 17 per cent and 19 per cent respectively.

Some companies have watched their stock eclipse the indices rises. The shares of the 82 per cent tax-payer owned Royal Bank of Scotland have shot up by 50 per cent in the past year, while the 39 per cent state-backed Lloyds Banking Group has jumped by 115 per cent. The much beleaguered financial sector overall has enjoyed strong gains, with Schroders up 77 per cent and Prudential 52 per cent.

But Bestinvest managing director of business development and communications Jason Hollands says: “There is an ongoing recovery but in the grand scheme of things it will be slow and protracted – the one thing that is missing is the banks are not lending.”

Chase de Vere head of communications Patrick Connolly adds: “We are far more comfortable with UK equities than we are with the UK economy, which we see as still fragile. It would not take too much to knock it sideways or even backwards. If the US’ stimulus measures, for example are pulled too quickly or too soon, it could have a huge impact on the UK.”

But if it is the case that we are set for a real UK economic recovery, Connolly believes the £830m Investec UK Special Situations fund should serve investors well; managed by Alastair Mundy, it has returned 78 per cent over the past five years.

Connolly says: “The UK funds we like take a long-term view and often tend to invest in UK stocks which derive a large proportion of their profits from overseas. We like funds with adapability.” Connolly also recommends the Richard Plackett’s £1.7bn BlackRock UK Special Situations fund. 

Hollands, who also tips the BlackRock vehicle, which has delivered 53 per cent over five years says despite the better economic news people would be better off avoiding funds which are heavily geared towards cyclical stocks.

He says: “We prefer funds which focus on valuation, those which invest in stocks where there is a re-rating potential. One that fits this bill for example is the Liontrust Special Situations fund.” The £883m fund has achieved a 110 per cent over five years.

He adds: “We like funds which invest in stocks that have a higher barrier to entry, strong intellectual property proposition. We are cautious on funds which are too close to their benchmarks because they will be inevitably heavily geared towards oil and gas and we are bearing towards commodities in general, as China’s demand for them has reduced.”

For those looking for a fund which concentrates on companies with good cash-flows and strong dividends, with ability to grow them, Hollands cites £1.9bn Threadneedle UK Equity Income fund, which is up 50 per cent over five years.