first state manager sees no easy money to be made in sector
Derek Lygo, manager of the First State British Mid-cap fund, believes the sector no longer looks cheap against the FTSE 100 after rallying since March this year.
In his eyes, there is no easy money to be made from mid caps at present and it will be harder for the sector to outperform now that the valuation gap with the FTSE has narrowed.
Lygo, who joined First State in October 2001 from Dresdner, is confident the appetite for mid caps will remain and some further upgrades take place.
Since its launch in February 2002, Lygo's fund has struggled performance-wise, being second quartile since launch and fourth quartile in the UK All Companies sector over one year to 30 June 2003.
He said this has occurred because the portfolio is designed to outperform in a rising market and therefore has an above-average exposure to economically-sensitive stocks, which has hurt its numbers in a bear market.
Following the recent pick-up in equities, particularly among small and mid-cap sectors of the market, the fund is currently first quartile over three and six months.
Lygo said: 'The shape of my fund is slightly different to others in the peer group because around two-thirds of the stocks in which I invest are towards the larger end of the mid-cap universe, such as those that make up the top third of the mid-cap sector by size.'
In the nine months to 21 July 2003, small caps outperformed mid caps by 7%, with the smaller mid-cap stocks also providing stronger performance than those at the higher end of the mid-cap scale, said Lygo.
The fund has been doing well since the rally in March by virtue of the fact that FTSE 100 companies typically tend to lag in a rally and both small and mid cap companies outperform.
He said: 'Throughout the bear market since the tech, media and telecoms bubble burst, large-cap, blue-chip stocks have done very well.
'However, there is now more of an appetite to recycle some of this money back into mid caps and the fund has done well as a result.'
Another positive factor for Lygo is that he can see pockets of rising prices beginning to emerge. He cited the example of P&O, the second largest holding in the portfolio, which has been experiencing an improvement in its container shipping rates.
One area in which Lygo has been taking profits is housebuilders. He said while they look cheap at present, they are only making money on their land banks, so will not be profitable if the value of land stops rising.
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