Best performing funds for UK investors in 2021 so far (2023)

British smaller companies were the biggest investment winner in the first half of the year, according to new analysis, while so-called ‘old economy’ stocks have pushed their way to the top of the FTSE 100 leaderboard.

The UK's FTSE small cap index climbed 19.4 per cent to beat major markets from around the world, including the FTSE 100, S&P 500 and Japan's Topix, according to AJ Bell research.

And the DIY investing platform said that investors in UK smaller company funds saw the best sector returns, with the average fund up 20 per cent over the first six months of the year.

Five of the top ten performing funds invest in UK smaller companies, the best of which was Aberforth UK Smaller Companies, which was up 32 per cent. That paled in comparison to the leader of the FTSE 100 pack Royal Mail, however, which rose 71 per cent.

FTSE small caps are stand out winners

UK shares have staged a comeback in recent months, largely down to the success of the vaccine rollout and the cyclical rally of the past six months, where companies that do well as the economy improves lead the way.

Investors have been largely bullish on UK stocks since the start of the year, even in the face of new coronavirus variants.

There has been something of a sea change in attitudes towards the UK stock market in recent months. The rapid vaccination programme has been widely touted as underpinning the recovery, while the diminishing impact of Brexit issues has also boosted confidence.

This bounceback sawthe FTSE 100 post a total return of 10.9 per cent in the first half of the year, but it still lags behind the US market.

‘The Footsie is still playing second fiddle to the US stock market despite the rally in value stocks which make up such a big slug of UK plc,’ Laith Khalaf, AJ Bell’s financial analyst said.

Playing a part here is the huge US stimulus introduced. Alongside its vaccine rollout and lesser lockdown restrictions, the US has committed $400billion in cash payments to US adults, while Congress has agreed a $1.2trillion to a new infrastructure investment package.

‘The real stand out winner of the year to date has been the UK Smaller Companies market, which has enjoyed an incredibly hot streak of performance,’ Khalaf said.

The FTSE Small Cap index has soared to record highs and is around 20 per cent higher than pre-pandemic levels.

This represents something of a vote of confidence in the economy - the Bank of England has forecast 4 per cent GDP growth in the second quarter of 2021 alone - given that the index has a larger exposure to domestic revenues than the blue chip FTSE 100, which is trading around 10 per cent lower.

Khalaf suggests it is also a sign of investors positioning themselves for a risk-on market, which is when stocks outperform the less risky bond market.

While small caps may have benefited from vaccine rollout optimism, the exact opposite has happened for bond funds which have had a ‘pretty grisly year so far’.

‘Bonds can still offer portfolio diversification, but it’s hard to maintain a positive outlook on the asset class, particularly at the longer dated end of the market, given such low yields and a global economy that looks like it’s beginning to take off,’ Khalaf said.

Gilts are government bonds which means they are particularly sensitive to changes in interest rates. Prices rise when the BoE cuts the interest rate and fall when it goes up.

As such mounting inflation, which could lead to the central bank hiking the base rate, could see further sell-offs in the market.

‘It would be a shock to bond investors who have enjoyed a long bull market, and who generally invest in these assets because they’re risk averse,’ Khalaf added.

The UK 10-year gilt is currently yielding just 0.73 per cent, but that is up from just under 0.2 per cent at the start of the year.

‘Old economy’ stocks stage a comeback

The rise of the high stakes lockdown DIY investor has captured headlines this year, particularly off the back of people trading high octane so-called ‘meme stocks’ and cryptocurrencies.

AJ Bell said a sign of this is how UK-listed firms Argo Blockchain has been used by investors to gain exposure to the crypto markets.

But it was old economy shares that posted the best FTSE 100 gains, as growth expectations and the prospect of rising inflation has prompted discussions about a rotation into value stocks.

Royal Mail led the way - as it rode a pandemic parcel delivery boom - with a 71 per cent gain, while international construction equipment rental specialist Ashtead racked up a 56 per cent rise.

The FTSE 100 took a significant hit at the start of the pandemic but has since staged an impressive recovery, in part because it is so strongly weighted towards value stocks like financials.

Indeed, Lloyds Bank has been a strong favourite among investors with the share price climbing just over 35 per cent in the year-to-date.

Ladbrokes owner Entain has also seen its stock rise 54 per cent as it pivots to online amid betting shop closures.

‘The top end of the FTSE 100 performance table carries a distinct whiff of the old economy,’ Khalaf said. ‘While communications, logistics and gambling are longstanding industries, these markets have moved with customers, and the times.’

‘Royal Mail takes a turn on delivering parcels ordered by consumers online, BT owns the mobile network EE, and Entain derives most of its revenues from online betting and gaming.’

Elsewhere AJ Bell’s analysis shows DIY investors are seeking out bargains and piling into other value stocks like British Airways owner IAG and Rolls Royce.

Growth funds continue to dominate the list of most popular funds but there has been a shift in investor preference. Jupiter UK Special Situations and Blackrock World Mining have seen rising demand look to the recovery.

‘Some investors are positioning themselves in more cyclical areas, in preparation for an economic recovery, and perhaps inflation,’ Khalaf said.