How to invest if you really want to buy British
CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.
This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the fund prospectus (or in the case of investment trusts, Investor Disclosure Document and Articles of Association), available in English, and KIID/KID, available in English and in your local language depending on local country registration, available in the literature library.
When people think about the UK stock market, they usually think of the FTSE 100. The index is made up of the 100 largest companies listed in the UK and its movements are quoted every night on the evening news and on the homepage of The Financial Times.
Yet despite its status as the UK’s flagship stock market, its fortunes have little to do with those of its home country. The international nature of most FTSE 100 companies means they derive a very small proportion of revenues from the UK: less than 20%, in fact1.
So what should investors do if they really want to 'buy British?' Well, if you want to push up your exposure to the UK economy, we would recommend looking down.
British sales, British jobs, British taxes
Market capitalisation refers to the total value of a company's shares in issue. Although the size of a company falls as you go down the market cap scale, the exposure to the domestic economy tends to increase.
For example, our portfolio of small, listed companies derives more than 60% of revenues from the UK2. Many of our holdings are large UK employers, such as pub company JD Wetherspoon (42,000 UK employees3), government outsourcer Serco (30,000 UK employees4) and food producer Bakkavor (14,000 UK employees5).
They also make a significant contribution to tax receipts: as detailed in JD Wetherspoon's annual report, it contributed £780.2 million in tax in 2024 and £6.1 billion over the last decade.
Creating a 'growth loop'
Most UK investors will be tired of hearing the valuation argument for buying UK small caps (UK equities are cheap and UK-listed small caps potentially even cheaper). But is there an altruistic argument for buying them, too? Could increased investment in UK-listed smaller companies help accelerate growth and create a virtuous circle that attracts further investment? We think so.
Whilst the United States has been blessed by a prevailing narrative of 'American exceptionalism', the UK has attracted much less flattering labels, perhaps summed up as 'British declinism'. Labels are often misleading (more of which later) but it's unarguable that UK small caps have suffered a decade of fund outflows.
UK Smaller Companies sector net fund flows (£m)
Source: Investment Association
Negative fund flows can create a vicious circle. Companies face the consequences of a higher cost of capital and therefore invest less, which affects growth, productivity and employment prospects. This in turn affects confidence. What can be done?
If domestic investors whether it be pension funds, ISA holders or institutions - can be persuaded to invest in UK small caps, we could see a virtuous circle or 'growth loop'. Increased investment. Faster growth. Rising confidence. Further fund inflows.
How does this work? Fund inflows reduce companies' cost of capital as their share prices rise. A lower cost of capital reduces the required-rate-of-return hurdle that companies must exceed to justify investment. Higher investment boosts productivity and UK growth. Critically, investors who are early would also be handsomely rewarded through strong equity returns as share prices re-rate upwards.
A role for policy?
There is an argument for government intervention. Whilst there would be plenty of legitimate opposition to encouraging (or even mandating) increased allocation to UK equities, there are two important counterpoints:
1. The UK's domestic ownership of its listed equity market is unusually low.
Domestic and foreign ownership of listed equity (%)
Source: Haver Analytics, Goldman Sachs Global Investment Research
2. The cost of pension and ISA tax relief is substantial: £49 billion per annum for pensions and £9 billion per annum for ISAs. The government is right to be asking whether it is getting sufficiently good value for money from these tax breaks.
Estimated gross and net pension income tax and NIC relief, 2019 to 2020 to 2022 to 2023, £ billions.
Source: HMRC
ISA tax relief
Source: Peel Hunt, HMRC
Fundamentals are not broken
Despite the 'British declinism' label, the negative narrative that surrounds the UK is not supported by fundamentals.
UK consumers have been reducing debt-to-income levels for 17 years, unemployment is low, savings rates are high and real incomes are rising6.
Businesses have strong balance sheets - for companies that we hold in the fund, the median company is forecast to have no net debt next year.
The UK has a (relatively) centrist government that is likely to be in place until 2029, making it look remarkably stable compared with many other countries. In addition, we are now starting to see the government back up its growth rhetoric with action, especially in the fields of planning and regulation.
What is missing is confidence - and confidence can change quickly. The situation only needs to be 'less bad' for confidence to inflect and the growth loop to begin.
Compellingly selfish reasons to invest in the UK
There is indeed an altruistic rationale for investing in UK small caps - but also a compellingly selfish one: the prospect of strong, risk-adjusted returns from a segment trading well below intrinsic value. Britain isn't broken. We think you should buy it.
Notes and references
- https://www.lseg.com/en/insights/ftse-russell/the-uks-very-global-country-index
- Artemis
- https://www.jdwetherspoon.com/about-us/people/ as at 30/04/2025
- https://www.serco.com/uk/careers/graduates/what-serco-can-offer-you as at 30/04/2025
- https://jobs.bakkavor.com/content/About-Us/?locale=en_GB as at 30/04/2025
- Lazarus Economics/ONS to 30/04/2025
Risks specific to Artemis UK Smaller Companies Fund
- Market volatility risk The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency risk The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.
- Charges from capital risk Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Smaller companies risk Investing in small companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.
Risks specific to Artemis UK Future Leaders plc
- Market volatility risk The net asset value of the trust, and the income it receives from its investments, can rise and fall because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.
- Currency risk The trust’s assets may be priced in currencies other than the trust base currency. Changes in currency exchange rates can therefore affect the trust's value.
- Derivatives risk The trust may invest in derivatives with the aim of profiting from falling (‘shorting’) as well as rising prices. Should the asset’s value vary in an unexpected way, the trust value could reduce.
- Leverage risk The trust may operate with a significant amount of leverage. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested. A leveraged portfolio may result in large fluctuations in its value and therefore entails a high degree of risk including the risk that losses may be substantial.
- Charges from capital risk Where charges are taken wholly or partly out of a trust's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.
- Smaller companies risk Investing in small companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.
- Income risk The payment of income and its level is not guaranteed.
Important information
The intention of Artemis’ ‘investment insights’ articles is to present objective news, information, data and guidance on finance topics drawn from a diverse collection of sources. Content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security or investment by Artemis or any third-party. Potential investors should consider the need for independent financial advice. Any research or analysis has been procured by Artemis for its own use and may be acted on in that connection. The contents of articles are based on sources of information believed to be reliable; however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current opinions, expectations and projections. Articles are provided to you only incidentally, and any opinions expressed are subject to change without notice. The source for all data is Artemis, unless stated otherwise. The value of an investment, and any income from it, can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested.
