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A surprise route to the best UK shares

Where can you find the best UK stocks? There are dozens of ways to answer this question. One response that may not immediately spring to mind is “in a global equity fund”.

To clarify, I am not saying you should rush out and buy a global fund as a direct play on the UK, because in many cases this will leave you sorely disappointed. Our home market made up just 4.3 per cent of the (extremely US-heavy) MSCI World index at the end of March, and this is reflected in the composition of many global portfolios. As the “fund managers’ favourite international shares” segment of this magazine’s Ideas Farm series shows, UK shares are pretty rare among  a selection of top global funds’ biggest overweight positions. It’s just names like Diageo (DGE) and London Stock Exchange Group (LSEG) that made the cut in a mid-March update for the series.

While the Ideas Farm presents a fairly tight list based on selected funds’ top three overweight positions at a given time, broadening out the search still yields very little. Perusing the top 10 holding lists of some of the last decade’s best performers, we find that Baillie Gifford Global Discovery (GB0006059553) recently had a 4 per cent exposure to Ocado (OCDO). Elsewhere Gam Star Disruptive Growth (IE00B5VMHR51) lists Boohoo (BOO) as a top 10 holding, while Rathbone Global Opportunities (GB00BH0P2M97) holds Next (NXT)

Lindsell Train Global Equity (IE00B3NS4D25) does more to fly the flag for the UK, potentially because of the management team’s expertise here. The fund’s top 10 holdings recently included not just Diageo and London Stock Exchange Group, but also Unilever (ULVR) and Relx (REL). Fundsmith Equity (LU1053186349) does not currently include UK names in its top 10.

The fact that UK stocks so rarely represent major positions in global funds suggests that those making it into the top 10 may warrant further attention, even if this is just to reaffirm why you do (or don’t) already hold a company's shares. Either way, it’s another source of possible ideas.

Similar thinking can apply to regional funds, given they can generally invest up to a fifth of their assets in markets outside of their stated geography. If a UK or European equity fund is putting an overseas stock into its top 10, or even into its portfolio at all, does that mean the company is too good not to hold? On the other hand, does it tell us something about the limits of a fund’s “home” market?

To give one example, Liontrust Income (GB0032325093) manager Robin Geffen uses his overseas allowance to hold Microsoft (US:MSFT) and Visa (US:V). Last year a commentary on the fund stated: “We believe technological/digital disruption will be the single greatest theme within both the global economy and financial markets over the coming decade. However, it is difficult to invest in mature technology within the UK market – therefore we utilise our ability to invest in mega-cap tech stocks.”

This, and the general the scarcity of UK stocks on global fund factsheets, also serves as a reminder of the dangers of so-called “home bias”. The domestic market may seem most familiar to us, but focusing on a smaller set of companies inevitably limits our choices. There’s a reason global stocks and funds remain important for many UK investors.