Do you need a more patriotic portfolio?

A couple of decades ago, most private investors would have a healthy chunk of their portfolios in UK equities of one sort or another. This made sense. Not only did investors not have to worry too much about currency, they were generally investing in familiar companies – BP, M&S, Next, Barclays. This provided some reassurance through market turmoil and also provided a neat hedge with their long-term savings goals, which were usually centred on a UK-based retirement.

UK plc has come in for a bit of a bashing since then. The financial crisis did little for the reputation of the UK’s blue-chip banking sector. The sheen has also come off other top British brands, such as BP or Vodafone. The UK economy has had to deal with the fall-out from Brexit, plus low growth and low productivity. It has tested investors’ patience, and many have sought the more obvious charms of global funds, and the US in particular.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Even the UK’s own pension funds stopped backing the UK market. A survey last year showed just 4.4% of assets in UK pension funds are invested in British equities. That’s down from 6.1% last year and more than 50% 25 years ago*. This reallocation has undoubtedly weighed on the performance of the UK market.

As a result, this move towards global funds has been the right option over the past decade, with global stock markets – and the US in particular – outperforming the UK by some distance. Today, however, investors might want to consider whether a more patriotic portfolio might serve them better.

The majority of the reallocation to global funds will have gone into the US, and the technology sector in particular. An allocation to the MSCI World, for example, will give investors a 70%+ allocation to US companies, and just 3.8% to the UK**. This has left investors very exposed in the recent market rout.

Since the start of the year, the FTSE 100 is up 6.7%***, providing an admirable defence against the forces unleashed by the US government. The S&P 500, by contrast, has had a rollercoaster start to the year and is down 9.3%***. It also remains vulnerable to another round of tariff announcements from Trump.

This illustrates the point that in rejecting the UK market, investors lose a valuable source of defensiveness in their portfolio. This hasn’t mattered very much in recent years when markets have been strong, but may start to matter a lot more in the uncertain environment we face today.

Income is also important. Investors in the UK would have had a 3.58% dividend yield^ to keep them grounded during the recent turmoil. The S&P 500 has a yield of just 1.27%^^. The UK remains the highest paying major market and has been a consistent and reliable source of dividends for investors. The Janus Henderson UK Responsible Income fund, for example, has a current yield of 4%^^^.

Two reasons to back UK plc

There are other factors to like about the UK market at the moment. First and foremost, it looks like a bargain.

Richard Knight, manager of the Allianz UK Listed Opportunities fund, says: “Mispricing is particularly extreme among UK middle-sized and smaller companies, where we are seeing the most attractive opportunities right now. Active investors, and particularly UK-focused strategies, continue to experience outflows, which creates distortion in pricing with generally asymmetric reactions to news amid net selling pressure.”

He admits that he doesn’t know when these conditions will change, only that they can change quickly and unpredictably. “Many decades of stock market history show how fundamental value reasserts in asset prices over time.”
It is also possible that the UK swerves the worst impact of Trump tariffs. The UK does not appear to be a target for reciprocal tariffs, and is less exposed than other trading areas.

Jeremy Smith, manager on CT UK Equity Income, says: “The UK seems to have so far avoided the worst potential outcomes. We believe this is due in part to the UK market’s heavier exposure to defensive sectors, in which the fund is overweight, and low trade surplus with the US.”

The tentative recovery in the UK stock market seen since the start of the year has been largely focused on the UK’s largest, blue-chip companies. However, history suggests that this often filters down into mid and small-cap companies once investors grow more confident in a specific market. It may be worth considering a fund such as the AXA Framlington UK Mid Cap fund or the IFSL Marlborough UK Micro Cap Growth fund to take advantage of any potential rally in this part of the market.

Other markets may look more exciting, but the UK has its merits. We may be about to enter a world where qualities such as good value, reliability, and income generation become very important. In this case, the UK may start to have real appeal.

*Source: New Financial, September 2024
**Source: index factsheet, 30 April 2025
***Source: FE Analytics, total returns in pounds Steiner, 31 December 2024 to 5 May 2025
^Source: London Stock Exchange, at May 2025
^^Source: S&P, at December 2024
^^^Source: FE Analytics, at 6 May 2025

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.