Never mind the growth stocks

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The British economic outlook may be stormy in the short term, but UK-listed stocks could still be strong performers. (Getty Images)

Consumers may be becoming panicky in the UK, but the LSE gives exposure to global leaders.

It might seem an unusual time to be investing in UK equities: consumers are overstretched, corporate investment plans have been hit by the credit crunch, and the government is working with a budget too tight to give much stimulus to the economy.

However, UK-listed companies earn around 60% of their income from overseas, meaning that many equities could still thrive during the country's impending recession.

Simon Brazier manages the Schroder International Selection UK Equity Fund for Schroders, and says that the UK equities market does not necessarily give investors exposure to the UK economy.

"The top 15 companies make up 50% of the whole UK market," he says.

"If those 15 companies are up 10% it doesn't matter what happens to the other 640 companies." Mega-cap companies have traditionally traded at a discount to the market and offered a higher dividend yield, due in part to the strong recent performance of mid-cap companies.

Brazier says that the UK equities market is extremely liquid and accessible, and considers it more transparent than other European markets.

The Schroders fund is one of the few offshore UK equity funds, and is domiciled in Luxembourg. It takes a three-year view of its investments, meaning that it does not necessarily trade every day. It aims to be fully invested at all times and is index-unaware, so it does not attempt to mimic the composition of the FTSE All-Share index.

"We aim for at least 50% exposure to the FTSE-100 and a maximum of 10% small cap exposure," says Brazier.

"The way I run my fund is very much diversified. We run more than 50 stocks."

The fund under-performed in the first 10 months of 2007, but its forward-looking approach is now paying off. It aims to outperform the FTSE All-Share index by 2% net per year.

In the first quarter of this year, the index fell 9.9%, while the Schroder UK fund declined 7.6%. Since June 30, 2006, the fund has delivered 8.5%, compared to 4.5% for the index.

Brazier says the negative outlook for the UK economy has caused him to focus on companies with strong balance sheets and dependable profits, especially those who serve the corporate rather than consumer sector.

This has meant a move out of UK-focused retailers. Its top holdings are now in banking and pharmaceutical & biotechnology companies.

"We moved out of growth stocks and property at the end of 2006," says Brazier.

"In difficult times, I want to stick with the companies I know."

When the outlook becomes more positive, the number of stocks may go up and more growth stocks may be added.

The fund's strategy caused it to miss out on around 1.2% of upside from mining stocks, but Brazier says that it is still likely to outperform funds that do not exit before the sector drops.

It seems there is still the potential to make good returns from UK equities, even though the high street and the government treasury may be in for a tough year.

With huge multinational companies like Vodafone, HSBC and GlaxoSmithKline listed on the London Stock Exchange, there is every opportunity for UK equities to benefit from strong performances in other parts of the world.

"You're not buying UK Plc, you're buying global leaders, which you can't get in other markets," Brazier explains.

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