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Adviser Fund Index – Domestic upheaval

UK equities took a battering at the start of last week as global stockmarkets reacted to fears over the US economy. The FTSE 100 fell by 5.5 per cent on Monday, January 21, finishing the day over 300 points lower at 5,578.2. The index has recorded far bigger single-day percentage falls in the past but many investors were surprised by the scale of the decline.

The FTSE 100 index reacted positively to the Federal Reserve’s shock cut in interest rates on Tuesday but fell again on Wednesday following a speech by Bank of England governor Mervyn King. He warned that the UK economy would have to “navigate some distinctly choppy waters” in 2008. He raised the prospect of an economic slowdown but said further interest rate cuts were unlikely in the short term.

However, not all investors are pessimistic on the outlook for the UK and some fund managers used the market falls as a buying opportunity. Greg Bennett, who runs Marlborough’s UK large-cap growth and UK equity income funds, topped up his holdings in financials, industrials and commodities during the volatility.

He says: “There is no doubt that the economic outlook has worsened and the Fed’s decision may be delaying the inevitable. There are problems in terms of the credit that has been extended to people but it is not looking calamitous and some stocks are more than compensating for the additional risk. People have sold indiscriminately.”

The Adviser Fund Index panellists also appear to be maintaining their long-term perspective despite the recent turbulence. Both Sam Sibley, an investment manager at Beckett Asset Management, and Mick Gilligan, director of fund research at Killik, remain sanguine.

Sibley says: “We invest with a five-year timeframe and it is dangerous to be short term in your outlook. It is tempting to make a kneejerk reaction but we will look back in a few years and this will just be a blip. We still have a core weighting in the UK.”

Within her UK allocation, Sibley says she has reduced her exposure to mid-caps and is focusing on large-cap funds and earnings visibility.

Gilligan, meanwhile, is increasing his exposure to experienced UK equity managers, such as Invesco Perpetual’s Neil Woodford and Axa Framlington’s Nigel Thomas.

Despite his preference for Woodford’s income and high-income portfolios, Gilligan has moved away from equity income funds because of their exposure to financials. However, he says there are opportunities in the sector and he has increased his holding in Jupiter’s specialist financial opportunities fund.

Whatever the future for UK stocks in 2008, they continue to be the most important influence on the performance of the AFI. The Aggressive, Balanced and Cautious indices have weightings of 39, 40 and 36 per cent respectively to domestic equities.

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