We launched the JPM UK Equity Growth Fund in December 2008, amid huge market turmoil and just before a sharp rally from value stocks in 2009—making it a particularly tough environment to launch a growth strategy. Having just enjoyed its 10-year anniversary, I thought it was a fitting time to see what has changed in markets over the last decade. I was somewhat surprised by what I discovered.
Despite all the noise and the political turmoil of recent years, it’s actually been a period of above average returns for UK equities. Over the last 10 years, the FTSE 100 has returned over 50% before dividends, and over 120% on a total return basis (that’s 8.3% annualised and above the since inception average returns1).
But in terms of market valuation, the picture is actually pretty similar, with the FTSE 100 trading on a price-to-earnings (P/E) ratio of around 11x and a dividend yield of 5%. The lack of valuation re-rating implies that UK earnings (the “E” in the P/E multiple) have kept pace with the market’s appreciation, meaning the UK has delivered plenty of growth in corporate earnings. However, if we look at a simple bond/equity yield ratio, because of the fall in bond yields, equities look even cheaper on a relative basis than they did 10 years ago.
Growth, value, large cap or small cap?
This era of low and falling bond yields has also had a profound impact within the UK equity market, favouring growth companies (where earnings are expected to come in future periods) over value companies (where earnings are expected to come in the short-term) due to the relative discounting of future earnings streams.
We can see this trend most clearly in the strong outperformance of the FTSE 250 and FTSE Small Cap indices, which generally have more growth potential than the large-cap FTSE 100.
So, does this strong performance from lower down the market cap spectrum mean we have had big change at the top? The short answer is no. As shown in Table 2, the biggest companies in the UK, which represent around 50% of the entire market, have barely changed over the past 10 years.
This is in stark contrast to what we have seen in the US. At the top of the S&P500 (the market-cap weighted index of the biggest companies in the US) there has been huge change, driven largely by the rise of fast growing technology stocks (see Table 3).
Back in 2008 acronyms such as “FAANG”, which refers to the group of five fastest growing US tech stocks (Facebook, Apple, Amazon, Netflix and Google), hadn’t even been coined. For example, Amazon only ranked 112th in the S&P500 and Facebook wasn’t taken public until 2012.
There are a number of reasons we could postulate for the rise of US tech stocks over the past 10 years. No doubt Silicon Valley had the right culture of innovation combined with a dynamic and flexible workforce with the right skills. The listed technology and communications sectors were also far more established in the US by 2008 – representing over 20% of the S&P500 (today it has grown to almost 30%), whereas the weighting has remained around 10% in the UK’s FTSE 350 Index2 . It’s clearly been hard for companies based outside the US to challenge the US dominance in key areas, such as internet search, where often the winners take all.
One further explanation for the relative lack of change at the top in the UK could be the concentration of companies with international earnings, such as in the oil & gas and pharmaceuticals sectors. Many of the top 10 names are US dollar earners, meaning there is a positive translation impact when sterling depreciates. Compared to 2008, one dollar of earnings is worth almost 60% more today in sterling than it was 10 years ago. To the extent that the companies have sterling cost bases, there is also a margin benefit from the revenue/cost mismatch.
This currency tailwind also helps to explain why Ashtead, an equipment rental business that generates the vast majority of its revenue in the US, holds the award for jumping the most places in the FTSE 350 over the past 10 years (gaining 256 places, from 300th to 44th position).
Good stock selection has been critical in the UK
In US portfolios you could argue that sector allocation has been more important than stock selection. Any investors that have been underweight technology, especially the FAANG stocks, will have likely had a tough time. But in the UK, sector leadership has been less pronounced, so accessing the best growth has been about finding the right stocks within sectors.
Sticking with the technology sector, the UK might not have any FAANG equivalents, but it has offered some fantastic growth opportunities over the past 10 years. One example is Aveva Group, a global leader in industrial software that is at the forefront of the transition to “Industry 4.0”, which refers to the computerisation of manufacturing processes (think of factories with machines that can predict failures and trigger maintenance processes autonomously).
Aveva is known for developing the world’s first 3D plant design system, and last year merged with Schneider Electric’s software business, bringing together a portfolio covering all aspects of digital asset management. This has contributed to a period of above expectations growth and very strong share price performance, leading to a gain of 52 places in the FTSE 350.
There are many similar growth stories within less traditional growth sectors too, including consumer durables (for example, housebuilders such as Barratt Developments) and industrials (for example market leaders in niche production processes such as Spirax-Sarco and Rotork).
Despite all the noise, the past 10 years in UK equity markets has been a rewarding place in which to invest, delivering over 8% in annualised returns for investors. But perhaps the most remarkable thing has actually been the lack of change in market leadership.
Without huge structural change in market composition, the most important focus for investors has been bottom-up stock selection within sectors, with some of the biggest winners coming from the mid and small-cap spaces. Looking forward, in the event of a favourable Brexit outcome and a strong recovery in the currency, perhaps there’s a chance that a successful growth story could even one day break into the top 10.
Ben Stapley is portfolio manager for the JPM UK Equity Growth Fund
 The FTSE 100 has delivered 7.5% annualised total returns since inception 1984-2018. The FTSE All Share has delivered 7.9% annualised total returns since inception 1962-2018. Source: Bloomberg. Past performance is not a reliable indicator of current and future results.
 Weight of BICS Sector Level 1 – Technology , and Communications. Source: Bloomberg, 31 Dec 2018
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