There are lots of reasons to be positive about investing in the UK. Inflation has been brought back under control, interest rates are falling, and the UK economy is posting some decent growth figures.
But after a rocky first couple of months in government for Labour, recent headlines have been dominated by what tax changes Chancellor Rachel Reeves might make in the 2024 Autumn Budget at the end of October.
This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments and any income they produce can rise and fall in value, so you could get back less than you invest.
Remember, yields are variable, and no income is ever guaranteed. Past performance also isn’t a guide to the future.
UK takeover frenzy continues
One clear endorsement of the value on offer in the UK stock market is the continuing takeover activity across the market.
According to analysis by Peel Hunt, there have already been more takeover transactions announced in 2024 than in the whole of 2023, with almost half of these occurring in the FTSE 350.
And what’s more, these have been at an average of a 40% premium to the share price before the bid.
But who’s buying these UK companies?
The majority of bidders for UK companies so far this year have come from overseas investors. Another sign that if investors at home continue to shun the value on offer in the UK stock market, then overseas investors will take advantage.
Where can investors hunt for income?
When investors think about investing for income in the UK market, they tend to think about the giant household names that feature in the FTSE 100 as the place to go. These stable, mature businesses have their attractions. But the result of depressed share prices among higher-risk UK smaller companies is that the FTSE Small Cap index is expected to have a higher yield in 2025 than both larger and medium-sized companies.
Investors therefore have the chance to invest in businesses with the potential to grow rapidly and blossom into the giants of tomorrow, while also receiving a dividend while they wait.
Index | Forecast dividend yield for 2025 |
|---|---|
FTSE Small Cap | 4.33% |
FTSE 100 | 3.97% |
FTSE 250 | 3.88% |
Remember, income isn’t guaranteed, and yields are variable and aren’t a reliable indicator of future income. Source: Octopus Investments, October 2024.
Importantly, for each of these indices, dividends are expected to be more than twice covered by earnings – a key measure of how sustainable a dividend is.
How have the UK Wealth Shortlist funds performed?
Our Wealth Shortlist selections delivered mixed performance over the past year, and we tend to expect this from such a wide range of funds.
Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives align with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.
For more details on each fund and its risks, see the links to their factsheets and key investor information.
UK Growth
The best performing fund in the UK Growth section of the Wealth Shortlist over the last year was the Aegon Ethical Equity fund. The fund has been managed by experienced investor, Audrey Ryan, since 1999.
The fund invests in UK companies using an 'exclusions-based' approach, avoiding those involved in activities deemed unethical.
A result of this is the fund having a bias towards higher-risk small and medium-sized companies. This can increase risk as these companies tend to rely more heavily on the health of the UK economy.
This, combined with the fund's lack of exposure to industries like oil & gas and tobacco, means its performance can differ to more conventional UK equity funds.
Please note this fund has a holding in Hargreaves Lansdown PLC.
The weakest performer of our selections in the UK Growth sector was Liontrust UK Growth.
Our analysis suggests that the fund’s underweight exposure to financials and its investments in energy and technology stocks have proved a headwind to performance.
The fund looks to invest in companies with an 'economic advantage' – a sustainable edge over the competition that will allow them to earn above-average profits for the long term.
It’s co-managed by Anthony Cross, Julian Fosh, Victoria Stevens and Matthew Tonge – a team we think have the range of skills and expertise to do a good job for investors.
Sep 19 – Sep 20 | Sep 20 – Sep 21 | Sep 21 – Sep 22 | Sep 22 – Sep 23 | Sep 23 – Sep 24 | |
|---|---|---|---|---|---|
Aegon Ethical Equity | -1.03% | 30.05% | -27.68% | 10.37% | 25.47% |
Liontrust UK Growth | -10.99% | 26.08% | -5.53% | 10.86% | 7.42% |
FTSE All Share | -16.59% | 27.89% | -4.00% | 13.84% | 13.40% |
IA UK All Companies | -12.94% | 32.24% | -15.39% | 12.48% | 14.23% |
UK Equity Income
The best performing fund in the UK Equity Income section of the Wealth Shortlist over the last year was the Janus Henderson UK Responsible Income fund, managed by Andy Jones.
The fund returned 19.27%, ahead of both the FTSE All-Share index and the IA UK Equity Income peer group average.
The fund doesn’t invest in companies with significant involvement in areas some investors consider unethical. Instead, it mainly focuses on large and medium-sized dividend-paying companies in the UK.
The manager does have the flexibility to invest in higher-risk smaller companies too.
At the time of writing, the fund yields 3.70%. The fund takes charges from capital, which can increase the yield, but reduce the potential for capital growth.
The worst performing of our UK Equity Income fund selections was the Troy Trojan Income fund, which lagged the FTSE All-Share return, rising in value by only 11.64%.
Our analysis suggests the fund’s investments in financial services business St James’s Place and consumer good business Nestle have been among the more significant detractors from performance.
We think the fund, managed by Blake Hutchins, invests in companies that aren’t as reliant on a strong economy to thrive. So, we expect the fund to hold up better than the index in falling markets, but lose ground in a rising market.
Sep 19 – Sep 20 | Sep 20 – Sep 21 | Sep 21 – Sep 22 | Sep 22 – Sep 23 | Sep 23 – Sep 24 | |
Janus Henderson UK Responsible Income | -12.52% | 26.26% | -13.36% | 16.87% | 19.27% |
Troy Trojan Income | -8.42% | 9.32% | -10.40% | 6.86% | 11.64% |
FTSE All Share | -16.59% | 27.89% | -4.00% | 13.84% | 13.40% |
IA UK Equity Income | -17.28% | 32.74% | -8.64% | 13.50% | 15.14% |
UK Small & Medium-sized companies
The strongest performer in the UK Small and Medium-sized section of the Wealth Shortlist over the past year was the Legal & General UK Mid Cap fund, which delivered a return of 20.77%.
The fund invests in all the stocks from the FTSE 250 index, except investment trusts. The fund offers a purer exposure to UK businesses than a broader FTSE 250 index tracker and as a passive fund, it's a simple and low-cost option.
The worst performing fund in the UK Small and Medium-sized section of the Wealth Shortlist was the Amati UK Listed Smaller Companies fund, returning 8.30%.
Our analysis suggests the fund’s investments in the technology sector have posed a headwind to returns.
Sep 19 – Sep 20 | Sep 20 – Sep 21 | Sep 21 – Sep 22 | Sep 22 – Sep 23 | Sep 23 – Sep 24 | |
|---|---|---|---|---|---|
Legal & General UK Mid Cap | -15.38% | 40.44% | -27.49% | 14.10% | 20.77% |
FTSE 250 ex ITs | -15.29% | 40.85% | -26.79% | 13.62% | 21.41% |
Amati UK Listed Smaller Companies | 5.77% | 42.77% | -32.35% | -5.41% | 8.30% |
IA UK Smaller Companies | 0.53% | 51.21% | -32.36% | 1.84% | 15.94% |