There were several trends in the UK stock market this year which, if you managed to identify them, served you well.

Most obviously, although it may not have seemed it at the index level, large-cap stocks generally performed better than small- and mid-caps, although for the lucky few the small-cap space has been rife with takeover activity.

In terms of sectors, aerospace and defence topped the FTSE 350 leader board this year, followed by software, food producers, construction materials and media.

Against the odds, considering the relentless rise in interest rates and fears of a cost-of-living crisis, the consumer came through with retailers, leisure goods, travel stocks and even housebuilders performing strongly.

The worst-performing sectors were telecoms equipment, personal goods, chemicals, tobacco, beverages, metal and mining stocks and life insurers.

Below, some of the UK’s top fund managers reveal what worked and what didn’t work for them this year. We would like to thank everyone who responded for giving their time and baring their souls.

In the next two issues of Shares you will hear from managers on where they are seeing the best opportunities in 2024, stocks on which they have changed their minds and what they think will be the impact of artificial intelligence on their portfolios in the future.

Kartik Kumar – Artemis Alpha Trust (ATS)

What worked for you in 2023?

‘UK consumer discretionary stocks worked well for us in the second half of the year. Earnings were more resilient than most people expected in the face of weak sentiment, and airlines have been our strongest performers with share prices up 30% to 40%.’

What didn’t work so well for you in 2023?

‘UK banks have been a let-down. Natwest (NWG) is down 18% and Lloyds (LLOY) is flat, materially underperforming their European peers. Deposit margins have risen sharply, but that is taking time to come through in earnings because of hedging policies.

‘More generally, half the portfolio is in FTSE 250 stocks, which have struggled as investor sentiment towards domestic UK companies remains poor. A good example is investment trusts, where discounts have widened despite NAVs rising.’

Simon Barnard – Smithson Investment Trust (SSON) 

What worked for you in 2023?

‘Our four top-performing holdings in 2023 were all software businesses, with the best being (German firm) Nemetschek (NEM:ETR), which provides design software for the construction and media industries, up 68% year to date.’

What didn’t work so well for you in 2023?

‘Our worst-performing companies were unsurprisingly those whose results came in below expectations, such as Cognex (CGNX:NASDAQ), which provides factory automation equipment, and which suffered due to a slowdown in construction of new factories for semiconductors and consumer electronics. However, we believe these sectors will grow their plants in the near future.

Thomas Moore – Aberdeen Equity Income Trust (AEI)

What worked for you in 2023?

‘Large caps such as BP (BP.) and Shell (SHEL) worked well for us, producing solid results and strong cashflows as they benefitted from the choppy macro environment caused by rising interest rates, political change and war. Defence and aerospace giant BAE Systems (BA.) was another stock which benefited from this instability.’

What didn’t work so well for you in 2023?

‘Some small- and mid-cap stocks struggled in 2023 due to the difficult macroeconomic conditions and higher inflation. Buy-to-let lender OSB Group (OSB) was negatively affected by successive UK rate hikes which led their main customers, UK landlords, to change their behaviour considerably. Spread betting company CMC Markets (CMCX) was hit by a downturn in revenue after expanding into new markets in Australia. Year-to-date its shares are down 61%.’

Simon Gergel – The Merchants Trust (MRCH)

What worked for you in 2023?

‘Our strongest performance contributors were distribution company DCC (DCC), Irish building materials giant CRH (CRH) and fashion retailer Next (NXT). Overall, the portfolio has seen a continuation of the strong recovery in income generation since the pandemic. Sectors such as energy and banks remain well capitalised and strongly cash-generative, which supports future income generation.’

What didn’t work so well for you in 2023?

‘It was a difficult year for medium- and smaller-sized companies, as money flowed out of UK equity funds putting selling pressure on that part of the market in particular. We have actually added positions in medium-sized companies, because that is where we have found the most compelling value opportunities.

‘At the portfolio level, the biggest impact on performance came from wealth manager St James’s Place (STJ), renewable energy company Drax (DRX), and transport company Mobico (MCG).’

Guy Anderson – Mercantile Investment Trust (MRC) 

What worked for you in 2023?

‘Our greatest success this year came from some longstanding investments in the financial and technology sectors, including private equity company 3i (III) thanks to its stake in (Dutch) discount retailer Action which continues to make substantial market share gains.

‘Our holding in alternative asset manager Intermediate Capital (ICP) was another bright spot, with their fund management company continuing to attract new assets and deliver strong financial performance.

‘In the technology sector, our investments in Bytes Technology (BYIT) and Softcat (SCT), the value-added resellers, benefited from robust corporate demand for IT infrastructure. These companies have also seen gains in market share and there is scope for revenue to accelerate as customers begin to adopt generative AI solutions.’

What didn’t work so well for you in 2023?

‘Like many consumer discretionary names, luxury retailer Watches of Switzerland (WOSG) has felt the impact of inflation on disposable income. However, we continue to believe in the management team who have recently released their long-range growth plan, which if achieved, should drive sales and profits over the next five years.’

James Henderson – Henderson Opportunities Trust (HOT), Law Debenture (LWDB) and Lowland (LWI)

What worked for you in 2023?

‘We were fortunate to have holdings in Marks & Spencer (MKS) and Rolls-Royce (RR.), two companies which have ‘rediscovered their mojo’. M&S took the tough decision during COVID to close stores and that focus is now feeding through into operating results, plus it is getting its flair back in clothing and offering better value.

‘Rolls-Royce began the year with that statement from the new chief executive about it being a “burning platform”, which seems to have given momentum for the business to face up to some serious problems. The rewards have fed through quickly. In smaller stocks we have been helped by several companies being taken over, often at big premiums.’

What didn’t work so well for you in 2023?

‘We were premature buying back some of the alternative energy companies after reducing our holdings a couple of years ago, and our lives would have been a lot easier more generally without the down-rating in valuations of medium and smaller companies.

‘There have been some disappointments in earnings, but it’s the downdraft from the rush of investors to the exit door on UK stocks that’s been the biggest problem. When investors return the uplift could be dramatic.’

George Ensor – River & Mercantile UK Listed Smaller Companies Fund (B1DSZS0)

What worked for you in 2023?

‘Given the extremely depressed valuations of UK micro-caps, we have seen takeovers return with bids for Instem (41% premium), City Pubs (46%) and Smoove (69%). Those three positions contributed significantly to performance since the end of June.

‘We have also seen strong progress from our “recovery” investment cases where self-help to improve margins and depressed starting valuations combine to deliver strong returns. Renold (RNO), up 49% year-to-date, is a good example, while more recent additions IG Design Group (IGR:AIM) and Inspecs (SPEC:AIM) have started to deliver on their margin recovery investment cases.’

What didn’t work so well for you in 2023?

‘Growth, and particularly AIM-listed small-cap growth, has been massively derated. The AIM market has fallen from a one-year forward PE ratio of 22 times in September 2021 to 11 times today and the AIM market has fallen by 46%.

‘Smaller companies have underperformed the wider UK market by over 35% since September 2021. There have been outflows from open-ended smaller companies’ funds for 26 consecutive months, meaning share prices have primarily been driven by flows and sentiment rather than fundamentals.’

Jamie Ross – Henderson Eurotrust (HNE)

What worked for you in 2023?

‘Novo Nordisk (NOVO-B:CPH) has been one of our strongest contributors this year as it moved from being a diabetes-driven company to an obesity company. They launched their obesity drug, Wegovy, at the end of 2022, and the growth in demand has been exceptional. In addition, Wegovy reduces the risk of secondary cardiovascular events in obese patients with a history of cardiovascular issues.’

What didn’t work so well for you in 2023?

‘Our long-standing position in (food and health ingredient-maker) DSM Firmenich (DSFIR:AMS) had a disappointing year due to destocking in their core markets as well as a very weak market for vitamins, but we are sticking by our long-term focused investment case.’

Julian Bishop – Brunner Investment Trust (BUT)

What worked for you in 2023?

‘The performance of Microsoft (MSFT:NASDAQ), our largest holding, was particularly pleasing thanks to terrific results driven by its Office 365 suite of software and Azure cloud computing unit.

‘(Danish drugmaker) Novo Nordisk (NOVO-B:CPH) also performed very well thanks to exceptionally strong demand for its products driving earnings growth approaching 50% for the year and making the company the most valuable in Europe.

‘More obscurely, we also enjoyed good returns from Greek discount retailer Jumbo, where strong expectations for earnings growth coupled with a rerating and some significant dividend payments meant the stock delivered a total return of around 80%.’

What didn’t work so well for you in 2023?

‘US discount brokerage Charles Schwab (SCHW:NYSE) has suffered from rising competition in the US driving fees for trading down to a minimal level, so the company now makes most of its money from interest income.

‘Higher interest rates were and are a good thing for their business, but at higher interest rates customers pay more attention and divert their cash into interest bearing accounts, impacting the company’s key income stream.

‘A second problematic name has been US beauty company Estee Lauder (EL:NYSE), which has a lot of exposure to the skin care category in China, which has failed to recover as anticipated this year. Bloated inventories at key retailers have exacerbated the issue.

‘We always review our underperformers as a matter of process and currently we’re happy with the long-term portfolio investment cases for both.’

Charles Montanaro – Montanaro Asset Management and Montanaro UK Smaller Companies Investment Trust (MTU) 

What worked for you in 2023?

‘One of our best performers – which also happens to be one of the largest holdings – has been Games Workshop (GAW).  The shares have climbed 25% so far this year on solid trading across all channels.

‘We are particularly excited about the potential for growth in the US and Asia as well as the partnership with Amazon, which could result in joint content production.

‘Another holding that has performed well is XPS Pensions (XPS), the pensions consulting and administration business, which enjoyed a 61% jump in its share price in the first 10 months of 2023.

‘During the year we lost Dechra Pharmaceuticals to takeover. Although the business was acquired for a hefty 47% premium, we rarely celebrate the disappearance of one of our longest-standing investments.’

What didn’t work so well for you in 2023?

‘NCC (NCC), the cyber-security consultancy, has been a disappointment. The shares took a hit in the early part of the year after the company issued a profit warning as demand in the US suffered from mass layoffs in the technology sector and the turmoil in the US banking sector (collapse of Silicon Valley Bank and bailout of First Republic Bank). The shares have recovered by c.25% since then (April 5th to November 24th).

‘Another investment that fared less well than hoped is Tracsis (TRCS:AIM), the provider of software and analytics to the rail sector and traffic data and events. Having been a strong contributor to returns in recent years, the shares fell by 26% (to November 14th) partly due to a de-rating of AIM in 2023.

‘AIM has underperformed the small-cap end of the main market for eleven consecutive quarters, including Q3 2023. Ironically, Tracsis has done well, reporting full year revenues up 19%, adjusted EBITDA up 13% and more than doubling operating profits. With plenty of opportunities especially in US rail, it remains a core holding.’

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