The best place to go hunting for value in the UK stock market

There is still value in UK stocks

In my opinion, Alex Wright is one of the best up-and-coming fund managers in the UK. Possibly the best.

So I was interested to see his latest take on the UK stock market in a magazine interview.

Unsurprisingly, Wright was pretty positive about the market – fund managers normally are. But I was struck by his view that the best value lies at the top and bottom ends of the market.

In other words, Wright thinks there is real value in the FTSE 100, and some value among small cap stocks – but he’s less keen on mid-cap stocks.

His comments inspired me to have a trawl through the FTSE 100 to see if I could find some bargains – and three stocks stand out to me…

Who is Alex Wright?

If you’ve never heard of Alex Wright, he’s made his name managing the Fidelity UK Smaller Companies Fund.

The fund has delivered a 425% return over the last five years, and Wright is the top-performing small-cap manager over that period, according to Citywire.

This year, he’s also taken over the Fidelity Special Situations Fund, which aims to go against the pack and invest in unloved shares that look cheap. There’s no constraint on the size of companies here.

Wright likes the FTSE 100 at the moment because it’s trading at a discount to its historical averages, whereas the mid-caps and small-caps are trading at a premium. In other words, the FTSE 100 is cheaper than usual, whereas the others aren’t.

In the interview with What Investment, Wright said: “there is value within the FTSE 100 – there are companies there which are undoubtedly unloved, and so don’t get examined enough. Only the FTSE 100 is currently trading at a discount to its historical average, a discount of 8.4%.”

How to invest in the FTSE 100

If you agree with Wright and think the FTSE 100 looks attractive, the easiest way to invest is put money into a FTSE 100 passive fund. These are cheap, simple funds that invest in all the stocks in the FTSE 100.

The Legal & General UK 100 Index Trust is one of the cheapest passive options. If you invest via the Hargreaves Lansdown platform, the total expense ratio (TER) on this fund is a super-low 0.1%.

However, as an overall platform, Hargreaves Lansdown is more expensive than many of its rivals, so you may prefer to invest via a different platform. If that’s the case, take a look at Vanguard’s FTSE 100 ETF which has a 0.1% TER. (ETF stands for exchange-traded fund.) This ETF is available on most platforms, including Hargreaves Lansdown.

Now, I’m a big fan of passive investing, but I also enjoy investing in individual stocks. And if you’re not quite as enthused about the FTSE 100 overall, you might prefer to pick some of the more attractive-looking companies rather than just investing in the index.

So here are three attractive FTSE 100 stocks that have caught my eye, two of which Wright is also keen on.

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First is global banking group, HSBC (LSE: HSBA). HSBC managed to navigate the financial crisis without too much pain and without any government bail-outs. It’s been growing its dividend since 2011 and now has a 4.8% dividend yield. It also has a price-to-book ratio of 1.05.

If you’re confident that the global economic recovery is set to continue, then HSBC is a good play on that. Indeed, that’s why HSBC is one of Wright’s largest investments.

If you’re interested in reading more about HSBC as well as another UK banking tip, check out James Ferguson’s excellent MoneyWeek magazine cover story on the UK banking sector. If you’re not already a subscriber, you can get your first three issues free by signing up for a trial here. You’ll also get access to the full MoneyWeek online archive, including James’s feature on the banks.

Two more great FTSE 100 stocks

Wright also highlighted Anglo American (LSE: AAL) in the interview. Although he’s not keen on the mining sector as a whole, he has been buying Anglo. He’s been drawn in by value here – Anglo American is trading at around one times book value.

He also points out that the ‘recent fall in the value of the South African rand has helped to make it very competitive.’ That’s because, while the company sells its metals for US dollars, many of its costs are in rand. So in effect, its costs fall even as the value of its sales rise.

My final company wasn’t highlighted by Wright. It’s just my personal FTSE 100 favourite at the moment – indeed I own shares. It’s drugs giant GlaxoSmithKline (LSE: GSK).

The main reason I like is Glaxo is its record as a dividend payer. It currently has a 4.8% yield and it has increased its dividend payout every year since 1996. I’m also impressed by the way Glaxo has coped with the ‘patent cliff’ issue.

In the late noughties, there was widespread concern about this so-called cliff. The worry was that large pharmaceutical companies would struggle to replace their best-selling drugs when patent protection for these drugs expired.

However, GSK has done well since then to launch several successful new drugs, which has meant we’ve only seen modest falls in revenue over the last five years. I’m confident that Glaxo can continue to develop attractive new drugs over the next decade – and in the meantime, it’s producing a steady and useful income.

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