Investment trusts to back the unloved UK's undeniable opportunity: The INVESTING ANALYST

What if the UK market isn’t the forgotten backwater of global investing but instead a hidden realm of impressive total returns?

In this column, Josef Licsauer, Investment trust research analyst at Kepler Partners, explains why we shouldn't shun less glamourous London-listed stocks.

The UK market has long been dismissed as an uninspiring place to invest.

Lacking the high-growth tech giants that dominate the US, it’s often seen as a home for 'boring' companies with little to no growth prospects—traditional banks, oil majors and tobacco stocks that don’t carry the same excitement as the market-darling tech names splashed across headlines.

At first glance, it’s easy to see why. Years of economic uncertainty—from Brexit to a revolving door of political instability—have served to reinforce this perception.

But such labels fail to capture the dynamism simmering beneath the surface—a market brimming with resilient, financially strong, yet undervalued opportunities hiding in plain sight.

For years, UK equites have traded at a discount to global markets, particularly the US, weighed down by sector composition, investor apathy, and the perception of limited growth potential.

But the tide is turning, not least as recent events cause investors to question US exceptionalism.

Since late 2021, rising interest rates have reshaped market dynamics. Despite a few cuts since August 2024, rates remain stubbornly high.

In this environment, UK companies have delivered steady returns, benefitting from strong cash reserves and healthy balance sheets—factors that have favoured rate-sensitive and income-generating stocks over speculative, high-growth plays.

Surprisingly, many UK stocks—particularly in the financial, service and defence sectors—have outperformed the AI-fuelled hype of the Magnificent Seven (Mag7).

These companies have quietly delivered standout returns, seemingly flying under the radar but proving that there is more to UK equities; they can deliver growth, too.

Clearly, the impact of tariffs on US tech giants has been stark Before Trump’s early tariff murmurs, the performance of the Mag7 was much more comparable—but fortunes have shifted fast.

These are high-growth innovators with huge return potential, but they’re not immune to sharp reversals.

In such a fast-moving environment, it’s crucial to stay focussed on the long term and consider diversifying across other growth avenues—such as the often-overlooked UK names that have delivered not just resilience, but impressive growth.

Over the past three years to 31 March 2025 – looking at pre-‘Liberation Day’ data to set aside recent volatility and instead focus on fundamentals over a few years’ time horizon – several FTSE 100 stocks have quietly delivered outstanding returns, largely unnoticed by investors.

When we compared the seven strongest-performing FTSE 100 names against the Mag7, UK stocks came out ahead, with average returns surpassing those of their high-growth US counterparts.

Take NVIDIA—the best-performing Mag7 stock—propelled by its dominance in semiconductors and soaring AI demand.

It delivered a staggering total return of 297.8 per cent, though that figure has slipped with recent tariff-driven volatility.

At the start of the year, it was trading at a lofty P/E ratio of c. 50x, yet Rolls-Royce—trading at less than half that valuation—has delivered far superior returns.

Meanwhile, the next six top performers in the FTSE 100—a mix of financial, services, and defence stocks—have outperformed five out of the seven Mag7 stocks.

Expanding the view further, the next 31 top-performing FTSE 100—including Babcock International Group, Imperial Brands and Barclays—have also outpaced five of the Mag7, delivering returns of 126.3 per cent, 120.3 per cent, and 119.3 per cent, respectively. Not bad for what many still consider the Jurassic Park of stock markets.

A key driver behind this quiet resurgence? Capital discipline.

Many UK-listed firms are in far stronger financial positions than a decade ago—an essential advantage in a high-interest-rate environment.

Fundamentals are improving, with higher return on equity and reduced leverage pointing to stronger profitability and healthier balance sheets.

Crucially, this financial strength is being channelled into shareholder-friendly actions that are driving stock returns.

Steadily increasing dividends remain a cornerstone of UK investing, while a surge in share buybacks— nearly half of UK-listed companies repurchased shares last year, the highest percentage among global markets—signals that companies themselves recognise their undervaluation and are taking proactive steps to enhance shareholder returns.

Simultaneously, persistently low valuations have fuelled a wave of corporate takeover activity, with international buyers looking to snap-up UK companies at discounts to intrinsic value.

These factors, combined, are driving total returns and reinforcing the investment case for UK equities.

But the buck doesn’t stop there. Further down the market-cap spectrum, several small- and mid-cap stocks have delivered equally impressive outperformance over the same three-year period.

Among FTSE 250 constituents, financial firms like Lion Finance (+473.0 per cent) and TBC Bank (+374.7 per cent) have significantly outperformed all Mag7 stocks, while others—XPS Pensions (+244.9 per cent) and ME Group (+235.3 per cent)—have beaten all but one of the Mag7.

And in the AIM market, a standout performer is a UK tech stock—yes, you heard that right.

Filtronic, a specialist communications equipment provider listed on AIM, hasn’t just kept pace with the Mag7 but flown past them, delivering an eye-watering 816.9 per cent return over the past three years.

Much like their larger counterparts, these companies have thrived on strong cash flows, higher rates, acquisitions, and a focus on robust shareholder returns.

Many UK stocks trade at lower valuations than high-growth US tech, yet some—like those highlighted earlier—offer comparable or even superior growth profiles.

So why are they being overlooked?

One reason is visibility. Unlike the Mag7, whose products are ingrained in daily life, many of the UK’s best-performing stocks operate behind the scenes, lacking the same front-facing brand recognition.

Meanwhile, the broader UK market has lagged the US, which combined with its ongoing economic issues have likely dampened investor sentiment further.

Yet, within this seemingly sluggish market, active stock pickers—particularly through investment trusts—have delivered strong returns by uncovering undervalued, financially sound businesses, like the ones highlighted earlier.

Despite this, many UK-focussed investment trusts remain on wide discounts to NAV, reflecting past struggles and lingering scepticism.

For contrarian investors, this presents an opportunity—not just for potential upside if sentiment shifts, but also enhanced yield in income-generating trusts.

Take Edinburgh Investment Trust (EDIN), currently trading at a wider discount than both its five-year average and sector.

Despite this, it’s outperformed its benchmark by 9.3 percentage points over the past three years (to 31/03/2025).

Its balanced, total-return approach—focussing on high-quality businesses like NatWest, that prioritise shareholder returns—has thrived amid a high-rate environment.

Similarly, Temple Bar (TMPL) has beaten its benchmark by 21.0 percentage points over the same period.

Its disciplined value investing approach—targeting attractively valued business with strong cash generation and sustainable dividend growth—has led to holdings like Standard Chartered which align with its shareholder-focussed, total return ethos.

This focus has helped it navigate challenging markets. While its discount is narrower than its five-year average, it remains wider than the sector, still offering investors a differentiated way to access UK equities.

Opportunities extend to smaller companies too. Fidelity Special Values (FSV) takes a multi-cap approach, diverging significantly from the FTSE All-Share to target overlooked and undervalued opportunities across the market-cap spectrum, including TBC Bank.

With smaller companies receiving less analyst coverage, it creates a fertile ground for discovering mispriced opportunities.

It’s outperformed its benchmark by 6.0 percentage points over the past three years, and while it trades at slightly narrower discount compared to its five-year average it offers investors differentiated access to this part of the market.

At the smaller end of the scale, Rockwood Strategic (RKW) focusses on companies trading at steep discounts to their intrinsic value, often overlooked due to limited research coverage and institutional interest—Filtronic being a standout performer.

This strategy has driven sector-leading performance, with RKW outperforming its benchmark by 50.6 percentage points over three years.

While it currently trades close to par, RKW’s distinct approach and differentiated portfolio provide investors with unique access to UK equities.

The UK market remains unloved, yet beneath the surface lie undervalued opportunities. Improving fundamentals alongside attractive valuations suggest that now could be a good time to time to look at UK equities—particularly through investment trusts, many of which trade at historically wide discounts.

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While the UK may lack the speculative excitement of AI-driven stocks, it offers something equally valuable—resilient businesses, strong cash flows, and a commitment to shareholder returns.

Recent market swings drive this home. Tariff-related volatility has triggered sharp sell-offs in major US names, erasing gains built up over years.

While global markets have felt some ripple effects, it’s been to a much lesser extent and the UK has delivered a modest positive return year-to-date, compared with an 8 per cent drop in the S&P 500.

This isn’t a call to abandon high-growth US tech or shift entirely to the UK. It’s about balance.

The UK market can serve as a valuable diversifier in a growth-heavy portfolio, providing access to a market that remains underappreciated yet rich with stock-specific opportunities.

For investors willing to look past the headlines, UK trusts offer a compelling entry point to these opportunities.