UK equities continue to trail their US and global peers. The FTSE 100 is up 3.9% over the year to 30 November on a total return basis, compared to 19% for the S&P 500.

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The difference between the indices and sectors is likely because the returns of the S&P 500 (and therefore of the global indices of which the US is by far the largest component) returns have been driven by the Magnificent Seven mega caps.

Excluding the Magnificent Seven, the S&P 500 has returned just 4.5% over the period. So, while all eyes have been on the US for the year, the UK market has not done too bad compared to the broad US market. Many US active managers, even if they like the stocks, will be underweight relative to the index as by market cap they comprise almost 30% of it, and that’s a lot of stock-specific risk to take on. If they have done that, they will likely underperform. In addition, the UK value index has outperformed Global and US value and growth indices, and UK growth, over three of the past four quarters.

Nevertheless, over one year to the end of November, UK All Companies lagged both the North American and Global sectors by 0.4% to 5.43% and 3.59%, respectively. Neither fanfares nor death bells toll for the UK market over the period, though you would certainly think the latter, given the state of fund flows, as UK All Companies has suffered £17.4bn of redemptions over the year to the end of November.

Broad trends aside, how have the sector’s funds been behaving? It’s been a year since I last looked at the sector and, over the time, there has been a significant shift in the sorts of funds leading the pack. At the end of 2022, growth funds made the running. Now, all except one of the 10 top funds are value, with the exception being core. Growth does not get a look in.

Three-year returns run from 47.9% to negative 33.8%, so, as ever, fund selection matters.

Invesco has two funds at the top of the table, headed by Invesco UK Opportunities Fund. However, it’s the second-placed Invesco FTSE RAFI UK 100 UCITS ETF that caught my eye. It’s a passive ETF, tracking an index whose constituents are weighted using a composite of fundamental factors, including total cash dividends, free cash flow, total sales, and book equity value. Prices and market values are not determinants of the index weights, although it still maintains a heavy weighting to Financials and Energy, like the underlying market. While this has particular factor tilts, it’s noticeable that funds that simply track the FTSE 100 are top quartile over three years—and, again, rather different to how the ranking looked a year ago.

Given how they’ve lagged other developed markets, which have consequently attracted the money, what is the case for UK equities? Well, they are comparatively cheap: in price-earnings terms, you are paying more for Chevron than you are for Shell. That, however, is not new: the UK market has been relatively cheap for some time, but we’ve yet to see that valuation anomaly translate into better returns.

It’s possible that if rates remain high, this could work in the UK’s favor, being more of a value market, and therefore one that should do better in such an environment. However, these have been the conditions over the past year: while it’s changed the style leadership of the sector, it hasn’t put the UK market to the fore—although that’s a changeable situation, with the FTSE and All Companies looking relatively better to the end of October.

A large slice of the S&P’s return was delivered over November after trending down since late July. While the FTSE rose, it did so at a slower rate. But then, if we could edit out the months that didn’t favor us, we’d all be better off. Sadly, the world doesn’t work that way. Nevertheless, the UK remains a market of strong governance, with companies that trade at a discount to their global peers.

Table 1: Top-Performing UK All Companies Funds Over Three Years (with a minimum five-year history)

All data as of November 30, 2023; Calculations in GBP

Source: LSEG Lipper

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