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Adviser Fund Index: Recovery position

Despite the equity rally which began in March, investors remain divided on the direction of the stockmarkets in 2009.

Anthony Bolton, former manager of the Fidelity special situations fund, pronounced the end of the bear market in an interview with Bloomberg Television on April 30.

However, a survey of 254 IFAs published last week by 1st – The Exchange shows 75 per cent of advisers view recent stockmarket gains as nothing more than a short-term rally.

Adviser Fund Index panellists, including Bestinvest senior investment adviser Adrian Lowcock and City Asset Management chief investment officer Hilary Coghill are also cautious.

Lowcock says predicting a stockmarket recovery is particularly tough because the financials-led nature of the recession is different to previous downturns.

“We are more in the ‘this is a bear market rally’ camp, although it is proving harder to sustain that point of view,” says Lowcock. “The market is ratcheting up strongly and this could be the last leg up before we see some profit-taking.”

Cost-cutting by some companies has allowed them to outperform already low earnings’ targets, adds Lowcock. This drove up the share prices of such firms over the past few months but replicating such gains will be harder without a recovery in demand.

Coghill is also wary on the macroeconomic outlook, especially for Britain and the eurozone. “We are cautiously optimistic but I would be surprised if we see a strong market rally from here,” says Coghill. “The financials have been salvaged, but we are still in a recessionary environment.”

Britain will continue to suffer the effects of overborrowing, she adds, while house prices may have further to fall. Meanwhile, the outlook for the eurozone is even worse because individual countries have less control over monetary policy and some banks “may have more pain to come”.

Within equities, Coghill favours East Asia, the emerging markets and the US. During the latest AFI rebalancing on May 1, she reduced her British and continental European weightings and increased her exposure to America and absolute return funds. She boosted her American allocation through the addition of Felix Wintle’s £110m Neptune US opportunities fund. “The US market is a very difficult market to call,” she says, “but the housing market may be bottoming and America has a more flexible economy than that of the UK or Europe.”

Because of her tentatively upbeat outlook, Coghill prefers absolute return-type equity funds. She added CF Octopus Partner absolute return – a £30m retail Ucits III Oeic unveiled last March – to her AFI selections during the rebalancing. The fund aims to generate positive returns in all market conditions through a range of strategies, including taking long and short positions. According to Octopus Investments, the portfolio had a net long exposure of 48.7 per cent at the end of March.


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