View more on these topics

Capitalise on large caps

Big may be beautiful once again. During the 1980s and 1990s, average annual returns of around 12 per cent above the rate of inflation were commonplace for blue chips.

Fund managers were able to generate strong gains for investors by mirroring the index but then it all went wrong and since the turn of the century small and mid-cap stocks have been where the gains have been made.

The FTSE 100 was just short of 7,000 on December 31, 1999 but then dramatically declined, deflated by the burst bubble of technology stocks, eventually bottoming out in March 2003 at about 3,000.

Recent figures tell the story. The FTSE Mid 250 on a capital-return basis over the four-year period between August 10, 2001 to September 5, 2005 is up by 29.8 per cent but over the same term, the FTSE 100, on a capital-return basis, has fallen by 1.65 per cent.

However, the value gap between small and mid-cap shares and FTSE 100 stocks has narrowed considerably and many investment professionals agree that the market today is more level and many believe the FTSE 100 could hit the 6,000 mark by the end of the year.

The past two to three years have been dominated by mid and small-cap stocks, with phenomenal outperformance, says Credit Suisse Asset Management director, multi-manager fund of funds Gary Potter, but he now believes there is better value now in the FTSE 100.

He says: “It is fair to say in the run-up to 2000/01, small caps had been left behind to an extent and were trading on significant discounts but this has changed dramatically.”

Potter notes that CSAM, while not overweight in large caps, has been raising its commitment to the sector while maintaining its exposure to the best stockpickers.

He adds: “Some stocks in the FTSE 100 are not that expensive but that does not mean that all of the FTSE 100 is cheap.”

Bates senior investment adviser Paul Ilott feels there is more balance in the market spectrum. He admits that there are a lot of fund managers who are not necessarily moving into large caps but he says he has witnessed a migration of assets towards bigger companies. He says: “At the beginning of the year, fund managers were telling us there were better opportunities in large caps than there had been for a very long time. We are not necessarily expecting large caps per se to outperform the rest of the market as it is still down to good stockpicking. If you look at the sectors – oil, financials and pharmaceuticals – then in a number of cases, it is not obvious that there is value across the range.”

Illot says some fund managers are telling him that large-cap pharmaceu- ticals are undervalued and telecommunications is another sector where fund managers are seeing better opportunities.

Gartmore head of UK equities Jon Thornton says big companies are coming under the spotlight but says good stockpicking is still necessary. “All the market sectors, small, mid and large,are now quite reasonably priced. This year, small and large caps have performed broadly in line with each other, with the former having the edge in performance. But the FTSE Mid 250 is hitting all time highs. We are seeing more opportunities relative to mid/smaller than two years ago. The valuation gap between the two sectors has narrowed. We are not particularly aggressively balancing ourselves one way or the other but we are more biased towards smaller and mids,” he says.

Thornton says the recent spate of merger and acquisition activity in the public and private sectors is telling in terms of what is happening in the large-cap arena.

Some individual large caps are offering better opportunities than they have done in the past few years but it is not just a case of moving wholesale into large caps, more a case of selective stockpicking into quality growth stocks, says Ilott.

He believes active management is still the way ahead and that investing into a tracker would not necessarily be recommended, especially as many fund managers are not shackled by the tight mandates they would have had years ago, giving them more scope to outperform.


New dawn for Japan funds

Prime minister Koisumi’s landslide victory in the Japanese general election means there should be a continuing period of stability. Corporate restructuring, deregulation and the growing strength of the underlying economy, along with a pick-up in domestic demand, are indications of positive returns on Japanese shares. Furthermore, the Japanese stockmarket looks cheaper than most other markets and its prospects are still not fully factored into stockmarket valuations.

Keep your clients warm for winter

My local newspaper has again been running pieces this week on the usual autumn topics with headlines such as, Rising prices could leave old folk in the cold, etc. I do wonder how many of our older clients are still not aware of a great gas and electricity scheme called StayWarm. This letter does not […]

FSA puts focus on variation clauses

The FSA is stressing the need for firms to check their consumer contracts are fair and that any variation clauses are clearly explained to clients. Speaking to the British Bankers’ Association last week, Katherine Webster, from the FSA’s retail themes division, outlined the position on contract terms following the publication of its statement of good […]

Middle England is done for, says Bee

Middle England will be left to fend for itself and will be worst hit by the pension saving crisis, pension guru Steve Bee warned delegates at Money Marketing Live in Manchester. Scottish Life’s head of pensions strategy said people on wages close to the national average will be the worst hit because they do not […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm