Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
Given persistent speculation about possible tax rises and changes to pensions in Labour’s budget next month, you might well have expected to see the UK stock market languishing over the summer. In the event, prices held up pretty well and falls where they occurred were mostly inspired by international issues.
At one point back in the spring, “Sell in May, go away, come back St Leger’s Day” looked as if it might be on this year. UK shares had risen strongly from January through April so a pause, at least, seemed possible. During the first half of May, however, we saw shares accelerating to the upside, with the FTSE 100 peaking mid-month at a new record high of 8,445.
Taken from that point, the market is down, but not by much. The damage was wrought mainly by a sell-off at the beginning of August, inspired by a rise in Japanese interest rates dismantling the last easy way to borrow at near zero cost to invest in higher yielding assets elsewhere. Had it not been for this dip, the FTSE 100 might have been higher today.
None of this will have troubled investors with buy-and-hold strategies. At the time of writing the FTSE 100 remains around 8% this year and that’s before we take into account a 3.6% dividend yield1. Please note, this yield is not guaranteed. Even taken from the worst starting point of 15 May, the index is only about 1.3% lower today2.
Immaculate timing in May would barely have produced enough of a margin to cover the dealing costs of a selling and buying round trip four months later. It certainly wouldn’t have for a whole range of shares and investment trusts taking commissions, spreads and stamp duty into account. Such a stingy result from a “perfect” trade highlights the difficulty of making a profit from a so-called seasonal trend.
This was no lone event. The latest research from Fidelity reveals just how hit-and-miss the Sell in May idea is. Looking at returns from the FTSE All-Share Index between 1 May and 15 September over the past 38 years, returns were negative on 14 occasions but positive 24 times. Clearly, investors have not been served well by the “Sell in May” adage.
We’re currently in the midst of another period supposedly worthy of caution. September is often singled out as a poor month for shares overall. Again, September 2024 looked to be a good testing ground for this, with the FTSE 100 having barely paused for breath all year. So far this month, the path has proven a little rocky, but the market has now largely erased earlier falls.
Much of the sideways movement of the past couple of weeks can be put down to indecision about the immediate way ahead for the US. On the one hand, recent data have shown weakening trends in employment and manufacturing that have fed recession fears. On the other, there are interest rate cuts to come which ought to be positive for both the economy and shares in general. Leaping one way or the other in markets at the moment looks unusually risky. That’s reflected in a straw poll of investors conducted by Fidelity earlier this week:
Around half (49%) expect the FTSE 100 to end the year broadly where it is today – in the 8,250 to 8,500 area – with just 22% expecting the index above 8,500.
Much as we might like to, there’s rarely an opportunity to escape the fact that timing markets is no substitute for time in the markets. The long term outperformance of shares over other asset classes is why legendary investors like Warren Buffett and, in the UK, the likes of Terry Smith, Nick Train and James Thomson have the investment portfolios they do. These managers have a strong preference for holding their investments over the long term.
For investors approaching retirement, the dangers of attempting to time markets are all the greater. Mistakes are harder to fix because there will be fewer market rebounds or pullbacks in future to right previous wrongs.
Here, the best tools to combat market volatility are having a diversified strategy and pound cost averaging via regular savings for adding to market positions. Both can help to ameliorate the effects of short term market moves when transitioning from a long term investment strategy skewed to growth towards a retirement portfolio most probably with a bias towards income.
Fortunately, for UK investors, the stock market continues to represent good value along with world-beating yields. UK shares currently trade on just 11.8 times forward earnings estimates, compared with around 18.8 times for world stocks3. Clearly, the Brexit/political upheaval discount has yet to fully unwind.
Moreover, taking share buybacks into account, UK shares are returning even more to shareholders than a 3.6% yield would indicate. Current returns look attractive given that interest rates on cash are set to fall while the dividends that companies pay tend to increase over time.
Deciding how to invest in the UK can be a challenge, given the vast array of funds, investment trusts and ETFs currently available. It’s quite possible to diversify your exposure by investing across a range of assets, investment styles and company sizes too. Fidelity’s Select 50 list of favourite funds aims to help hone a possible shortlist of funds from their entirety.
The FTF Martin Currie UK Equity Income Fund is one of three actively managed UK funds on the Select 50 list. Managed by Ben Russon, Will Bradwell and Joanne Rands out of Leeds, this fund aims to generate an income higher than that of the FTSE All-Share Index plus investment growth over a three to five year period after fees and costs.
Among the Fund’s 49 investments are holdings in some of the UK’s largest dividend payers, including Unilever, Shell and AstraZeneca, as well as medium sized companies including Cranswick and IG Group. The Fund pays a quarterly dividend and currently yields approximately 4.4%, an amount that is not guaranteed4.
The Liontrust UK Growth Fund is another actively managed Select 50 choice. It seeks to invest in companies with a durable competitive advantage that allows them to sustain high levels of profitability for longer than the market expects. Current large holdings in its 45 stock portfolio include AstraZeneca, Relx and BAE Systems5.
The Fidelity Special Situations Fund, run by Alex Wright, rounds out the active contenders. This is a contrarian, value-biased fund focused on underappreciated companies. As such, it offers an exposure to companies often not covered by other popular UK funds.
This fund currently has a broad-based portfolio of 107 separate holdings, with a 22% exposure to financials – mostly banks and life insurers. Large holdings include Imperial Brands, DCC and Aviva.
The Vanguard FTSE 250 UCITS ETF is one of two passive UK funds on the list. Fidelity’s experts like this fund due to Vanguard’s expertise in index tracking, a low ongoing fund charge and the fund’s focus on medium-sized companies, which have produced good long-term investment returns.
The other is the iShares Core FTSE 100 UCITS ETF, which holds the individual constituents of the FTSE 100 in the correct amounts to track the index. Fidelity’s experts note that BlackRock is a seasoned investor in passive funds and that this fund’s cost are low. As such, it may suit cost-conscious investors with a longer time horizon.
Source
1,2 London Stock Exchange, 17/09/24
3 MSCI, 30.08.24
4 Franklin Templeton, 31.08.24
5 Liontrust, 31.08.24
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Direct shareholdings should generally form part of a well diversified portfolio of other investments. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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