Omam fund favours oil, healthcare and support services, all of which should be immune to a consumer slowdown
With taxes rising in the UK, the Dublin-domiciled Old Mutual UK Select Smaller Companies fund is favouring stocks that will not be impacted by a consumer slowdown.
The product, managed by Luke Kerr, has achieved strong results over the past three years - returning 52.1% to 31 August 2006 compared with the 19.5% of its benchmark the Hoare Govett Smaller Companies (ex ITs) index, according to Old Mutual.
Kerr believes the fund will continue to perform well if he remains bearish on stocks related to the UK consumer such as media and retail companies.
He says: "Unemployment, taxes and interest rates are rising. We will not see any improvement for the consumer until interest rates start falling."
According to Kerr, media stocks are struggling because in the event of a slowdown, consumers are less likely to spend money on items such as magazines. Meanwhile, he believes business-to-business magazines' revenues are being eroded by the internet because people use this as a source of information. For these reasons, he likes online researcher Datamonitor because of its focus to provide its customers with online information.
An exception among the retailers, for Kerr, is Land of Leather. He sees this as a neglected stock that is cheaply rated. Kerr explains the store's latest results show order sales are up 25% for the four months ending July 2006, with the company opening 10 new stores during this period.
The areas in which Kerr holds a bias in his portfolio are oil stocks, healthcare and support services. In the oil sector, he holds new generation oil and gas company Venture Production as well as oilfield service company Expro International.
He likes Venture Production because the company buys oil fields that already have reserves, thereby reducing the expense of having to go and find oil. He says its cashflow has been strong with it trading at three-and-a-half times, compared to the market average of between five to eight times.
Within healthcare, Kerr favours care homes. He says: "These stocks will not be sensitive to a downturn in the UK economy. Care homes provide a service for people with learning difficulties or who have disabilities and are not dependent on consumers spending money.
"In addition, the NHS has been outsourcing these services to the private sector, which has seen them gain more income."
One such example is housing service company Care Tech, which has care homes for adults who cannot live independently. He likes this group as the firm has been acquiring similar companies as well as gaining mandates from the NHS.
Another sector that is strong in Kerr's portfolio is support services, because the Government has been increasing its contracts in this area. On the back of this, he likes property management group Connaught, which provides maintenance services to the social housing sector.
Another example is defence support services company Babcock, which makes Kerr's top 10 because it has been a beneficiary of outsourcing. The company has been winning Government contracts in the defence and engineering area.
According to Kerr, the company's strength was seen when it recently defended off a bid from BAE Systems and VT Group. It has visible earnings growth with revenues in its order book total more than £2.3bn.
Elsewhere, he has a neutral position in the financial sector. One company he favours, though, is debt group Accuma Debt Free Direct, which provides debtors with individual voluntary agreements. This means a person can avert bankruptcy with a five-year plan to pay off debt. Kerr says this has been very attractive because it will not impair their credit record. Banks also like it because they can recover around 45% of the owed money.
According to Kerr, the secret to his success is by using both a bottom-up and top-down investment approach. He says: "When we are in a mid cycle we tend to focus stock selection towards a bottom-up approach, but when we see the cycle is at a turning point top-down factors become more important."
Because the fund has performed well and is large in size, it was capped at £25m in May last year. Investors can only buy into the fund when someone redeems.
Minimum investment in the product is £10,000; the initial charge is 4% and annual management charge is 1.5%.
A performance fee was introduced in June 2005 of 10% on the outperformance of its benchmark.key points
Fund manager Luke Kerr is bearish on the consumer
Old Mutual Smaller Companies fund favours oil, healthcare and support services
Media and retail stocks may struggle
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