Thornhill Capital Trust manager Russell Wallis is expecting a revival in the telecoms sector on a si...
Thornhill Capital Trust manager Russell Wallis is expecting a revival in the telecoms sector on a six month view and his FTSE 100 portfolio's largest overweight is in the sector.
Telecoms have suffered from an earnings downgrade largely due to the high costs of the third generation licences. The debt levels of these stocks were enormous as a result of the licence purchases and this will inevitably eat into profits, Wallis said.
Even so he has a 20.6% exposure to the sector with Vodafone making up 9.6% of his portfolio, British Telecom 7.9% and Cable & Wireless 3.1%. He has gone overweight since the sell off in telecoms began.
He said: "To reduce these debts, the telecoms companies must now sell some of their businesses. The sector will therefore have to cope with a lot of new issues and there will not be a great rush to buy because so many stocks will be coming on to an already large market."
Wallis said these new issues would be digested in due course and telecoms continue to form an exciting industry. He is confident the sector is still a strong growth market and should recover in six months time.
He added: "The recent poor performance should be seen as a short-term setback in a long-term growth story."
One of the most notable trends in the blue chip index this year has been the fall in telecoms.
In January these made up some 24% of the FTSE but have since fallen back to 17.5%. BT has fallen from £15 to £7. Vodafone, the largest FTSE 100 stock, did make up 12.5% of the index and is now 10.8%.
Wallis said: "There has been a pendulum swing between the telecoms and the defensive sectors, such as banks, pharmaceuticals and utilities in the FTSE 100. The banking sector is currently weighted at 16.8% in the FTSE 100 and is thus now vying for the top space with telecoms.
"The FTSE 100 has been down 8.5%, year to date, and has been propped up by banks, pharmaceuticals, utilities and the oil sector. Volatility within the sectors has been enormous, and yet this is not immediately apparent. On 1 October 1999, the FTSE was at 5,970.7; but at the end of last week it was at 6370, a rise of around 7%."
Thornhill Capital Trust has a weighting of 13.6% in the banking sector; HSBC is its biggest holding here at 4%. The fund has some 13.6% in oil and gas.
Within FTSE, BP Amoco has a larger market cap than Shell, but Wallis is weighted most heavily in Shell at 7.3% as opposed to BP at 6.3%. This is because Wallis believes Shell has greater possibilities for organic growth and cost cutting, making it a better long-term bet.
The fund is weighted 13.6% in pharmaceuticals with SmithKline Beecham being the biggest holding at 5.9%.
The Capital Trust fund is benchmarked against the FTSE 100 index and Wallis aims for outperformance by controlled deviation away from index sector weightings.
The fund is based on about 35 to 40 UK blue chip stocks, usually chosen from the FTSE 100 index. Wallis favours blue chips to small caps because, he said, their flow of information and their liquidity is greatly superior.
The fr-AA rated Capital Trust is ranked 21 out of 203 funds in the UK All Companies sector over five years with a return of 139.56%, offer to bid with net income reinvested. Over three years it is ranked 30 out of 233%, up 66.7% and over one year the portfolio has produced a return of 11.13%, ranking it 109 out of 286.
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