Although we believe the outlook for the UK stock market is fair, with interest rates at or near thei...
Although we believe the outlook for the UK stock market is fair, with interest rates at or near their peak, corporate profitability still enjoying a post year 2000 boost, and takeover activity still high, the prospect of 15-20% overall market returns is low.
To achieve these sort of returns investors will have to choose something other than the market as a whole, which either means choosing the right sectors or the right stocks.
Over the past five years, choosing the right sectors has been the main driving force behind the returns from UK Growth funds. In 1997/98 banking shares performed well as investors benefited from consolidation hopes, large share buy backs and the technical effect of building society demutualisations. The telecom sector enjoyed high returns in 1998/99 from the explosion of growth in mobile phone usage, and in 1999/2000 it was joined by the technology and media sectors which all rose dramatically on a wave of internet euphoria.
However, as we prepare to begin 2001, picking the winning sectors is the most difficult it has been for some time. Investors are asking themselves "have we reached the bottom in tech, media and telecoms," or "have the banks got further to run." In addition, the disparity between growth and value stocks has all but disappeared when taking into account their respective growth rates.
So long as it remains unclear as to the next sector trend, stock picking will emerge as the way to add value to UK Growth funds.
This is where the fund manager, and his past record of consistently selecting the best performing stocks, will play a vital role.
This is where investors must differentiate between fund managers in terms of the depth of their research. At Jupiter we meet 20 companies a week on average.
This allows us to question management on the dynamics of their business and the future outlook and strategy.
With access to financial information on companies now widely available, most investors are working from the same data. The key to choosing winners is meeting management and getting to the issues that are not as readily available.
One of the issues we are focussing on as we enter 2001 is the risk of downside to corporate profits. We have seen a number of high profile profit warnings across all areas of the market.
Reasons cited include rising fuel costs, negative currency effects and the beginnings of a slowdown in the US. Investors are also having to look very closely at the accounting policies of many of the high growth stocks in their portfolios. This is further evidence investors must discriminate between companies even in industries with stellar prospects.
Kenneth Warnock is manager of the
Jupiter UK Special Situations Fund
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