Strategies for Capitalizing on UK Shares Outperforming the Stellar Seven: Perspectives from Financial Experts
UK's Hidden Realm of Totally Stunning Returns:
The Unsung Heroes of the Global Investing Stage
Step aside, Silicon Valley, it's time to fawn over the unsung heroes of the UK market, if you ain't already!
In this knockabout column, Josef Licsauer, the Investment trust research guru at Kepler Partners, flips the script on the UK market, demonstrating why it's a sin to shy away from London-listed stocks that aren't tech giants.
The UK has been branded as a dull, uninteresting market to invest in for ages. It may lack the alluring high-growth tech firms that reign supreme in the US, often coming across as the domicile for boring companies with little to no growth prospects compared to market darlings, financial heavyweights, and oil majors.
However, at first glance, this assessment is as lopsided as the Leaning Tower of Pisa. Years of economic uncertainty thanks to Brexit and political instability have merely reinforced this lackluster perception. But labels as common as socks hanging out to dry can't hold back the dynamism simmering beneath the surface — a market bustling with resilient, financially strong, yet unappreciated opportunities hiding in plain sight.
Water, water, everywhere, but not a drop to drink... Dollars, dollars, everywhere, but not a pound to invest?
For eons, UK equities have traded at a discount to global markets, especially the US, weighed down by sector composition, investor apathy, and perceptions of limited growth potential. However, the tides have started to shift, not least as recent events have cast doubt on the infallibility of the US.
Since late 2021, a surge in interest rates has gripped the market. Despite some slashes since August 2024, rates remain alarmingly high. In this interest rate environment, UK companies have quietly been delivering steady returns, taking advantage of solid cash reserves and robust balance sheets, which have favored rate-sensitive and income-generating stocks over speculative, high-growth plays.
Surprisingly, many UK stocks, especially in the financial, service, and defense sectors, have outshone the AI-fueled hype of the tech giants commonly referred to as the Magnificent Seven (Mag7). These unsung stars have come through with outstanding returns, seemingly flying under the radar, and demonstrating that there is more to UK equities than just stability — they can deliver growth, too.
The FTSE 100 — Big, Boring, But Beating Expectations
The impact of tariffs on US tech giants has been staggering. Before Trump's early tariff tantrums, the performance of the Mag7 was more comparable to the 'plebs' in the UK. But fortunes have changed rapidly.
These are high-growth innovators with mega return potential, but they're not impervious to sudden reversals. In such a fast-moving market, it's essential to keep your eyes on the horizon and consider diversifying across growth avenues that lie beyond the flashy tech sector. Enter the often-overlooked UK names that have quietly been delivering resilience and impressive growth.
Over the past three years to 31 March 2025 (prioritizing long-term fundamentals), several FTSE 100 stocks have been the masters of stealthy returns, largely unnoticed by investors. When compared to the Mag7, UK stocks came out ahead with average returns that surpassed those of their high-growth US counterparts.
Let's dive a bit deeper into the numbers:- NVIDIA, the top-performing Mag7 stock, delivered a towering 297.8% total return, although its lofty P/E ratio of approximately 50x has put a damper on things.- Rolls-Royce, on the other hand, with a valuation less than half that of NVIDIA, has delivered far superior returns in the same time frame.- The top six performing FTSE 100 stocks, a mix of financial, services, and defense firms, have outperformed five out of the seven Mag7 stocks.- Similarly, the next 31 top-performing FTSE 100 companies, including Babcock International Group, Imperial Brands, and Barclays, have also outpaced five of the Mag7, delivering returns of 126.3%, 120.3%, and 119.3%, respectively. It seems as if the 'Jurassic Park' of stock markets isn't so dull after all.
The Heart of the Matter: Capital Discipline
One key factor driving the quiet resurgence of the unglamorous stocks in the UK market is financial discipline. Many of these firms have weathered the past decade much stronger than before, providing them with an essential advantage in today's interest rate-challenged climate.
Fundamentals are improving, with higher return on equity and reduced leverage indicating stronger profitability and healthier balance sheets, which in turn is leading to shareholder-friendly actions such as increased dividends, amped-up share buybacks, and acquisitions. The cherry on top — persistent low valuations have sparked a flurry of corporate takeover activity, with international buyers eagerly scooping up UK companies at discounts to their intrinsic value.
This virtuous cycle is driving total returns and solidifying the case for UK equities.
Beyond the FTSE 100
But that's not all! The story takes an even surprising turn when we look further down the market-cap spectrum. Numerous small- and mid-cap stocks have been delivering equally impressive outperformance over the same three-year period.
In the FTSE 250 ranks, financial firms like Lion Finance and TBC Bank have significantly outperformed all Mag7 stocks, while others like XPS Pensions and ME Group have outpaced all but one of the Mag7. And in the AIM market, a standout performer is a UK tech stock, yes, a rare find!
Filtronic, a specialist communications equipment provider listed on AIM, hasn't just kept pace with the Mag7 — it has streaked past them and flown ahead with an eye-popping 816.9% return over the past three years.
Much like their larger counterparts, these less glamorous firms thrive on strong cash flows, higher rates, acquisitions, and a focus on robust shareholder returns.
Active Managers Finding Gold in Unexpected Places
Many UK stocks boast valuations lower than their high-growth US tech counterparts, but some, like those mentioned above, offer comparable or even superior growth profiles. So why are they being overlooked?
One reason is visibility. Unlike the Mag7, these stocks are primarily behind-the-scenes players, lacking the same marquee brand recognition as their American peers.
But savvy active stockpickers, particularly through investment trusts, have been unearthing undervalued businesses that are worth their weight in gold. Despite this, many UK-focused investment trusts remain on wide discounts to NAV, offering tantalizing opportunities for those who dare to defy the masses.
For instance, Edinburgh Investment Trust (EDIN), currently trading at a substantial discount compared to both its five-year average and industry peers, has outperformed its benchmark by 9.3 percentage points over the past three years. Its balanced, total-return approach focused on high-quality businesses, such as NatWest, and their emphasis on shareholder returns has been a standout performer in a high-interest-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 businesses with strong cash generation and sustainable dividend growth, has resulted in holdings like Standard Chartered that align with its shareholder-focussed, total-return ethos.
This proactive stance has helped it weather challenging markets while maintaining a discount that, albeit smaller than its five-year average, remains wider than the sector, presenting investors with unique, differentiated access to UK equities.
Opportunities extend to smaller companies too, as illustrated by Fidelity Special Values (FSV) with a multi-cap approach that diverges significantly from the FTSE All-Share, targeting overlooked and undervalued opportunities across the market-cap spectrum that include TBC Bank.
With smaller companies receiving less analyst coverage, it creates a fertile hunting ground for discovering mispriced opportunities. It has outperformed its benchmark by 6.0 percentage points over the past three years and despite trading at slightly narrower discounts compared to its five-year average, it provides investors with a distinct avenue to access 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 overshadowed due to limited research coverage and institutional interest, like Filtronic. This strategy has fueled sector-leading performance, with RKW outperforming its benchmark by 50.6 percentage points over three years.
While trading close to par, RKW's singular approach and distinctive portfolio provide investors with rare, exclusive access to the UK market.
The UK Market: Beyond the Forgotten
So there you have it, folks! The UK market may not be the forgotten backwater of global investing, but instead, a hidden realm of impressive total returns waiting to be uncovered. Improving fundamentals and attractive valuations suggest that it's an excellent time to take a closer look at UK equities, particularly through investment trusts, many of which trade at historically wide discounts.
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- Josef Licsauer, an investment trust research expert at Kepler Partners, advocates for UK-listed stocks that aren't tech giants, despite the market's traditional perception as dull and uninteresting.
- Despite the perceived limitations, recent events have cast doubt on the infallibility of the US market, leading to a shift in focus towards UK equities with steady returns and resilience, especially in the financial, service, and defense sectors.
- Over the past three years, several FTSE 100 stocks have outperformed high-growth US tech counterparts, with some even surpassing the returns of the 'Mag7' (top-performing US tech companies).
- The unglamorous, smaller UK companies have thrived in the high-interest-rate environment, thanks to strong cash flows, higher rates, acquisitions, and a focus on shareholder returns.
- Active stockpickers, particularly through investment trusts, have unearthed undervalued businesses offering comparable or even superior growth profiles to high-growth US tech companies, often trading at lower valuations.
- Opportunities to access this hidden realm of impressive returns extend to various investment trusts, including Edinburgh Investment Trust, Temple Bar, Fidelity Special Values, and Rockwood Strategic, which offer a distinct avenue to access the UK equity market through their disciplined strategies.
