Two funds for investing in ‘most attractive’ developed market

US market dominance has led to the country comprising more than 70% of the mainstream global index MSCI World, leading investors to increasingly seek diversification.

Additionally, with Morningstar’s US Dollar Index at its highest point in 20 years, there’s the possibility that returns from US equities for UK investors will be negatively impacted by the depreciation of the US dollar. However, this currency risk can be mitigated through an increased allocation to UK equities.

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UK valuations are relatively cheap, and while it faces deep structural issues, pessimism is quite extreme, suggesting room for upside surprises. It is important to stress that despite the negative macroeconomic and political narratives we regularly see regarding UK equities, the FTSE All-Share index is not a play on the domestic economy, with only circa 27% of revenues coming from the UK.

An acceleration of 2024’s bid activity may also provide support to valuations in the year ahead, particularly given that strategic and private equity buyers are likely to be attracted by the UK stock market still being at a big discount to its long-run average.

Morningstar believes that the UK is the most attractive developed-markets region globally based on relative valuations. In addition, macroeconomic tailwinds of rising gross domestic product (GDP), falling inflation, and lower interest rates, makes the picture looks even brighter.

However, it’s worth noting that this outlook comes with some risk due to potential future negative sentiment events, with historical examples being Brexit and the recent developments on US tariffs, which are unhelpful and unpredictable.

For those interested in this area of the market, two options on the interactive investor Super 60 and ACE 40 rated lists that have high Morningstar Medalist Ratings and span the value-growth spectrum, are Fidelity Special Values Ord (LSE:FSV) and Royal London Sustainable Leaders.

Fidelity Special Values Trust – Super 60

The investment trust is managed by Alex Wright, who has been at the helm since 2012 and at Fidelity since 2001. Prior to this fund, he successfully managed a small-cap strategy, and the all-cap nature of the fund clearly builds on that experience. An additional benefit is the support of the extensive Fidelity analytical resource.

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The process looks to identify unloved companies with the potential to recover based on factors such as a business model, corporate change or industry cycles, with the manager often buying into such situations at an early stage. Returns have been somewhat lumpy but have firmly worked in investors’ favour over the longer term. 

The thorough and well-defined approach leads us to have a positive view on the fund’s investment process. Generally, we have seen discipline and prudence in portfolio construction. Wright is an experienced manager with expertise in the space and we feel the fund is a high-conviction option for investors seeking a contrarian and value-oriented approach to investing across the market-cap spectrum of the UK market.

Royal London Sustainable Leaders – ACE 40

Mike Fox has managed the fund since November 2003, making him one of the longest-tenured UK managers in the sustainable investment space. George Crowdy and Sebastien Beguelin, who joined the group in 2020, support him as co-managers, alongside four dedicated analysts. They are supported by the broader investment team, which includes environmental, social and governance (ESG) specialists.

The fund shows a natural growth bias versus the FTSE All-Share index. Its aim is to invest in companies that deliver a net benefit to society in the products and services they provide, or that show leadership in ESG management.

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The ESG approach is designed to be flexible, and Fox primarily seeks to identify long-term growth opportunities that are under-appreciated by the market. The team conducts analysis to understand value creation and what is already implied in current valuations.

Overall, Fox has applied the approach consistently and to great success over longer periods. The fund’s socially responsible objectives and biases do, however, limit exposure to certain sectors and companies, which may result in a return profile that differs markedly from that of the index and peers from time to time, such as in 2022.

We feel that the fund is a good option for investors seeking a growth-oriented, sustainable approach to investing in the UK market.

Jack Paterson, investment analyst, manager selection services, at Morningstar.