By Stephen Whittaker, manager of the Invesco Perpetual UK Growth fund This may be a difficult me...
By Stephen Whittaker, manager of the Invesco Perpetual UK Growth fund
This may be a difficult message to digest for the private investors whose apparently broad-based funds are still struggling to make up lost ground, but right now, I believe the UK is a pretty sound place for active fund managers with an eye for good value.
The macroeconomic backdrop, despite gloomy news from the manufacturing sector, is a reasonably solid one, with continuing strong consumer and government spending keeping the economy afloat.
As things stand, there seems little chance of the recession that hangs over the US spreading across the Atlantic. Indeed, the UK economy is rightly viewed as one of the stronger economies in the world at present and the signs are that recovery will occur in the second half of the year.
The issue for fund managers is how to tap into it effectively. We are focused on economically sensitive stocks and those that stand to benefit from an economic upturn. There have been attractive buying opportunities among the stronger domestic companies in the consumer cyclical market, including retailing, housebuilding and construction. And some industrial cyclicals, such as engineering, steel and packaging have also been valued incredibly cheaply.
The fundamental approach ignores traditional designations of value and growth and concentrates exclusively on the hunt for attractive valuations. That means we are looking at the numbers that came out of our analysis of companies, rather than funds, fashions and share price momentum.
This strategy led to short-term underperformance during the tech boom of 1999, when we avoided TMT stocks on the grounds that they were dangerously overvalued.
That was a deeply unfashionable line to take at the time ' but since the bubble burst in March 2000, a fundamental approach has undoubtedly paid dividends.
We are prepared to be significantly different to the market benchmark. I don't believe that the FTSE index any longer offers a reliable blueprint for shrewd investors aiming to put together a truly diversified portfolio.
As a handful of giant corporations in the big four sectors have increasingly come to dominate the upper echelons of the stock market, it has become a much riskier benchmark in the past five years or so.
At present, therefore, although the fund I manage is about 50% invested in the FTSE 100, it is now markedly underweight in the big four sectors. But we don't avoid stocks simply because they are big: it is always a matter of poor valuations. To put that into context, one of the main ways it has been possible to add value in recent months has been by avoiding underperformers such as Vodafone.
Yet, at present, the two biggest holdings in the portfolio are Enterprise Oil and Lloyds TSB, which both look cheap relative to their sectors.
Recent engineering acquisitions include Johnson Matthey, which is heavily involved in the growth auto catalyst market and the development of fuel cells. On the retail side, Woolworth is an interesting prospect: there has been a refocusing of management and the price looks low.
Ultimately, that is a matter of monitoring every stock on its intrinsic merits ' but while that is partly a matter of making sure that the numbers add up, it is also a question of personal judgement on what is likely to power the economy in the coming years.
UK economy remains robust.
Opportunities will be in good stock selection.
Mid and small-cap valuations attractive.
Investor confidence low.
Potential for interest rate rises.
Gloomy news for manufacturing sector.
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