In 1999 a successful UK fund manager was one who made the right sector choice - to back TMT stocks. ...
In 1999 a successful UK fund manager was one who made the right sector choice - to back TMT stocks. As the market has become less one-sided, the year 2000 has seen the importance of good stock picking increase.
Peter Davies, who manages the Mercury OST UK fund, says: "Last year a lot of performance came from the TMT sectors. This year, it has been much more on strong stock selection across the board. The fund is now overweight pharmaceuticals and underweight consumer staples but this is not a built-in strategic bias, but a reflection of stock valuations."
Companies that have done particularly well for the fund have ranged from Astra Zeneca, British Airways, HSBC and Canary Wharf - performance has come from a much wider spread of stocks and sectors than last year.
David Stevenson, manager of Scottish Value Management's UK Growth fund, has also seen this shift, although his fund focuses primarily on the small to mid cap stocks.
Stevenson is still positive on the long-term future of TMTs, which account for around 6% of the UK market, giving the sector a lot of room for growth.
He says: "Two years ago there weren't enough IT companies going round. Now household names have dropped out the index to be replaced by tech stocks. Now you get to choose from many and you can afford to be selective."
Stevenson has generally found good value throughout the year more in mid cap than large cap stocks. He found that instead of holding Glaxo, for example, better valuations with the same earnings potential could be found in a smaller company like Shire Pharmaceuticals. The same principle applies to healthcare and pharmaceuticals, where he finds the FTSE 100 companies fully priced in comparison to their mid-cap bretheren.
The fund made a substantial amount of its 12-month performance in the last quarter of 1999 up until mid-March 2000 from its tech holdings.
He says: "We had stupendous year-end results last year. Then we obviously took a whack in March, sold out Logica and moved to the small and mid cap players in the market."
Stevenson still holds a 150% tech position relative to the Allshare, but the mix has moved away from telecoms and hardware.
He says: "We have also greatly upped the funds other major theme: business servicing and outsourcing. However, we've been overweight oils since Q1 this year. We have been very wary of mature and cyclical areas. We felt we could play the cycle through oils - Enterprise Oil is a big target."
This gives the fund exposure to the high oil prices although Stevenson will not follow the oil story all the way through.
He says: "In the next quarter, I don't see sector changes but there will be a growing disparity between stocks within sectors. As stock pickers, this should play to our strengths. I like to the think some of the tracking funds will get left behind."
Sector exposure is monitored carefully, but the fund is quite willing to take substantial sector bets. For example, the fund has generally been noticeably underweight cyclicals.
Stevenson says: "The cyclical markets are mature, don't offer pricing power and exporters are suffering from the strong pound.
"We have a checklist of what we look for. We start by looking at historic figures. You can't see if a forecast is achievable unless you know where the company comes from."
He invested in Logica in late 1998 at a sub £500m cap, held it all the way until it joined the FTSE 100. As Stevenson points out, "Performance, going from Ofex to FTSE 100, can be substantial."
At the moment, less than 20% of the fund is invested in the FTSE 100. The fund can invest on Ofex and AIM, although this is a small part of the fund.
Typically, however, the price range will be narrower, going from mid-cap size upwards. Stevenson has noticed the market's increased volatility in the average length of time he tends to hold stocks, which five years ago was three years and now has dropped by six months or so.
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