UK small caps are standing at a 20%-25% discount to the large cap area of the market, according to K...
UK small caps are standing at a 20%-25% discount to the large cap area of the market, according to Kenny Watson, UK smaller companies manager at Britannic Asset management.
The asset class has had a reasonable start to 2001 despite the continued negativity on the technology sector, which has a high weighting in the small cap sector.
The Britannic Smaller Companies fund has maintained a balance exposure in the portfolio amid the volatility, underweighting technology and overweighting cyclicals like construction stocks.
Watson said the group has taken some profits from the construction sector but remains wary of re-investing in technology having decided that there is still further for the sector to disappoint.
Consumer cyclicals like leisure are starting to look attractive with companies such as Enterprise Ends performing well year to date along with Luminar, both of which have risen out of the FTSE Small Cap index.
'While we invest predominately in the FTSE Small cap, we are not forced sellers and we can hold some 25% in mid cap stocks. We also hold some Aim companies but keep this below 5% of the portfolio.'
Other overweights in the portfolio at the moment include speciality and other finance stocks, food and drug retailers, transport on a stock specific basis and media.
In the Japan market, Britannic is feeling the pain of its decision to go heavily overweight banks relative to its peers. Last month Natasha Chetwynd, head of Japanese equities at Britannic, moved to an 11% weighting in Japanese banks compared to the 4% weighting of its peers in this sector and a 9% weighting in the Japan market. Since then there has been a downturn, she said, as banks continued to declare more bad debt.
'The problems in Japan are in technology and in banks. While I think technology is a problem that is here to stay for sometime, I did go overweight banks as it looked like they were re-inventing themselves and generating more income. Still it was not fast enough to offset the weak economy.
'This has been painful for me but at the moment they look oversold and they are still a much better place to be then in technology.'
Other overweight positions Chetwynd has taken in the Britannic Japan portfolio include defensives such as utilities. Selling on P/E's in their teens, many utilities are offering yields of 2-3%, which looks attractive in the Japan market, she said.
Restructuring continues to be the main play in Japan, she said, noting that trading companies are progressing in this area and are also benefiting from the rise in commodity prices.
On a six to 12-month outlook, Chetwynd predicts the Topix index, currently around 1300, will rise to 1600.
This depends on a good political environment and a bail out of the banks, she said.www.ifaonline.co.uk
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