Banks, defence and leisure favoured for Thompson's High Income fund

Defence, banks and engineering stocks are still the favoured content of Toby Thompson's New Star Higher Income fund, however several names which advisers might expect to see during a market downturn are now seen as risky investments.

Thompson says his fund remains overweight in leisure stocks and now account for 9% of the total portfolio, along with William Hill - which recently floated on the London Stock Exchange - as well as holdings in tour operators MyTravel and First Choice.

In particular, Thompson believes banks are still undervalued, even though the profit warning issued by Abbey National had an adverse effect on the sector, and several life assurance companies may face solvency issues.

According to Thompson, the banking sector actually outperformed in Q2 this year, so Lloyds TSB now accounts for 5% of the portfolio.

Likewise, his fund is overweight in defence stocks because the terrorism threat that governments fear since September 11 (911) have pushed defence spending back up.

However, the New Star Higher Income fund remains underweight in oils, telecommunications, pharmaceuticals and media.

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