By Jeremy Rigg, Fund Manager of the Investec UK Blue Chip Fund Investec Asset Management "W...
By Jeremy Rigg, Fund Manager of the Investec UK Blue Chip Fund
Investec Asset Management
"What is your view on the market?"
Is probably the most commonly asked question for the investing community and generally the one answered least well. After all, we are now mid-way through 2002 and already the FTSE forecasters are busy revising their year-end targets for the market - no doubt they will be revised again in October and still missed by a mile by about 90% of those participating. But nevertheless, all investors are expected to have a view on the direction of markets and it is no coincidence that a great many investment approaches go along the lines of "a mixture of top down macroeconomic analysis (i.e. is the market going up or down) combined with a rigorous and fundamental approach to bottom-up stock picking".
Some fund managers spend very little time at all considering macroeconomic analysis when constructing mainstream UK equity portfolios. Of course, they all have views on the outlook for house prices in Islington, unemployment rates in the North West and the likelihood that Stephen Byers will replace Gordon Brown as Chancellor but they deliberately ensure that top-down macroeconomic analysis plays no part in constructing their equity portfolios. Any sectoral or thematic biases within their portfolios are driven entirely from a bottom-up perspective.
So how can an equity investor cut out the "noise" and evaluate stocks for their portfolios? One starting point is to rank all stocks on a common basis, irrespective of sector or region - then to implement an equity stock selection process that is intuitively sensible, tightly defined, rigorously applied and which adds value over time.
Some fund managers use technology to cut through the data glut and there are very few products available to achieve this. SIGMa is one proprietary quantitative screening process that evaluates companies on four criteria: Strategy (in terms of the ability to generate returns above the cost of financing), Valuation, Dynamics (relative earnings per share revisions) and Technicals (share price trend). It produces an effective ranking of all companies and as such serves to focus an investment team's efforts on doing closer work on companies which "score well" on these four factors. Portfolios constructed using the system will always be biased heavily towards companies that are attractively valued, experiencing positive earnings revisions relative to the market, are generating added value for their shareholders and where the market is starting to recognise their attractiveness through positive share price trends.
If a fund manager were to evaluate all companies (ex Investment Trusts) within the FTSE 350, they could aggregate individual company scores to produce sub-sector and major industry group rankings, thus drive up any sectoral or thematic biases within these portfolios. Even if to a man the fund management house is convinced that the MPC will raise interest rates at the next meeting, they will remain overweight in house builders if construction is one of the best scoring sub-sectors.
So when someone asks us "what is your view on the market?" our answer is influenced by our stock selection process, which drives portfolio construction. For the last eighteen months it has steered us to adopt a defensive stance, with companies in sectors such as food producers, utilities, tobacco and beverages all ranking well, although it has also highlighted the attractiveness of some economically sensitive sectors such as general retailers and banks. Construction companies have also ranked consistently well. Companies in sectors such as IT, media, telecommunications, insurance and most industrial cyclical sectors have consistently scored poorly and consequently we have not been heavily represented in these areas. Over the last six months, the main shift has been an upwards move in general industrials whilst a number of the so-called defensive companies and sectors have begun to look less attractive. This has led to more balance in our portfolios at the sector level, although the portfolios have remained fairly light in sectors such as telecommunications and IT.
So "What is your view on the market?" I hear you say. Overall, our process is continuing to point to a defensive strategy, with sectors such as food producers, utilities and tobacco amongst the best. However, it is also worth saying that there is a good balance emerging across the market with defensive and more economically sensitive sectors competing with each other for attention. Mining companies, banks and construction all feature well currently and we are overweight in these sectors. Sectors which score less well include media, IT, telecoms, pharmaceuticals, healthcare, insurance and transport, all areas where we are underweight, although potentially the most interesting area is telecoms which is starting to rank a little better. But overall, whilst it is certainly true to say that there is a much less overt message from our portfolios than there was say 12 months ago, we continue to adopt a defensive tone and our answer must currently be that the market is heading lower.
For further information on the Investec UK Blue Chip Fund click on the link on this page to visit the funds microsite or call 0800 389 2299.
If you are interested in learning
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Three years at Wells Fargo
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Continuing the Architas education series for clients.
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