By Jenne Mannion The £55m Mercury UK Smaller Companies Fund is currently skewed toward consumer cycl...
By Jenne Mannion
The £55m Mercury UK Smaller Companies Fund is currently skewed toward consumer cyclicals on the back of fund manager Habib Annous' positive outlook for the domestic economy.
Annous expects that interest rates will peak in the next three to six months, inflation will stay under control and there will be above average economic growth over the next three years.
Within the broader consumer cyclical sector, the fund is overweight in housebuilders, which Annous described as trading on highly attractive valuations.
He said: "Many of these housebuilders are trading on the P/E ratios of 6.5 times current year earnings, which is the same as in 1988-89, prior to the massive housing recession of the early 1990s. Therefore, the price discounts an assumption that we will go into another massive slowdown. While it's possible the market may fall back slightly, we don't believe it will fall to the same levels as the 1992 recession."
The fund has bounced to 10 out of 77 funds, bid to bid, in the UK Smaller Companies sector over three months to 7 June. Over one year the fund is ranked 19 out of 76 funds and 23 out of 69 funds over three years, on an offer to bid basis.
The stronger short-term performance can be attributed to the fund moving underweight in technology at the start of the year, prior to the Nasdaq-led correction.
Annous said the key reason for the underweight position in technology is because he does not believe in growth at any price. He said: "Technology valuations are very stretched and in many cases, the risk reward ratio does not justify the price." The investments that Annous does have in technology focus on internet enabling companies, as well as companies which are not caught up in the froth of the internet, or are outside the Techmark index, for example those which provide technology for industrials firms.
Annous, who has managed the fund for the past three years, said the portfolio is constructed through a bottom up stock picking process.
He said: "When selecting stocks we look at them in the context of our expectations for the macroeconomic environment, a view which is derived with the help of the Mercury economic team.
"Stock selection is done through our own research of individual companies. Small companies as a sector is very under-researched and we aim to get an advantage over our competitors by not relying solely on broker information.
"In conducting our own house analysis, we look for how well they are aligned with customers, competitors and suppliers."
There are currently 99 companies in the fund, and the standard range is 90-100. Top 10 holdings in the fund are Prowting at a 3% portfolio weighting, followed by Crest Nicholson at 2.4%. Anglian, BICC and Biocompatibles International each equal at 2.3%. Roseby's is 2.2%, while Johnson Services accounts for 2% of the portfolio. Ascot represents 1.8% of the fund, while John Menzies and RPC each equal 1.7%.
Minimum investment in the fund is £1,000 lump sum or £50 monthly.
The initial charge is 5% and the annual management fee is 1%. IFAs are offered 3% front end commission and 1.5% renewal.
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