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What is the UK market?

An underwhelming outlook for the UK economy doesn’t mean that UK-listed companies can’t deliver strong returns.

ALT_TAGThe press usually treats the FTSE 100 as the UK market, but it is only a part of the investable universe open to you. In fact, it is an index of the 100 largest companies by market capitalisation that are publicly tradable in the UK.

However, the UK has much more to offer the investor than these large, usually multinational, companies.

Investors can also buy funds that invest only in the mid cap area of the market, measured by the FTSE 250 index, or the small cap area, measured by the FTSE Small Cap Index.

The FTSE All Share is taken as a benchmark by most UK equity funds including a much longer list of companies right down to smaller sizes, encompassing the FTSE 100, 250 and Small Cap Indices.

In general, the smaller the UK companies you trade, the bigger the risk and the bigger the potential rewards.

The Alternative Investment Market (AIM) is also investable, although companies that are listed on it tend to be harder to buy and sell and have less rigorous requirements on the information they have to provide to investors.

This index is typically made up of start-ups and fledgling companies, with the extra risk that goes along with them.

Why invest?

The economic news may appear to be pretty grim about the UK, but that doesn’t necessarily mean you shouldn’t invest in the country’s stock market.

UK companies and indices have done fairly well even during years of economic crisis. One of the reasons for this is that they often sell abroad, to faster-growing emerging markets.

This means that depending on the companies and funds you choose, you are usually getting a good degree of exposure to fast-growing emerging markets with UK funds.

Along with this, you get the better standards of corporate governance that the UK has. While not perfect, the English legal system and British corporate environment are much more business-friendly and accounting standards are more in alignment with shareholder interests than in the emerging markets that have the better economic growth rates.

The superior dividend culture is in a way an expression of this. While other developed and emerging markets have started to pay more attention to dividends in the current crisis, this is largely a recent phenomenon. By contrast, it has long been a well-established part of the business culture in the UK.

Dividends provide an important part of a shareholder’s total return, as well as being crucial for many investors who need to live off their investments.

They also give shareholders more immediate returns on their investments and ensure they benefit directly from the company’s profits.

What are the disadvantages?

Not all companies benefiting from this emerging market growth, of course, which means that many are trying to make money in a country with some serious economic problems.

Some analysts also question the value of buying actively managed funds towards the larger end of the UK market.

Like the largest companies in the US, the largest ones in this country receive a lot of attention from banks and other institutional investors, which arguably makes it harder for an individual manager to beat a passively managed index-tracking fund.

The correlation between the larger end of the UK market and that of other developed countries is also high in an era of globalisation and cross-border trade, meaning that investors have to query whether they need to hold funds for these individual countries.

As for the mid cap and small cap indices, they haven’t always outperformed. In the 1990s the FTSE 100 did better than both its smaller rivals, and there is no guarantee such a period won’t happen again.

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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