An overweight position in financials lifted performance of the Insight Investments European Small Cap fund by 23% in April alone.
Richard Wiseman, the manager of the fund, sold some of his defensive positions to move to 30% in European financial small-caps in February as he felt the downward trend in financials was overdone.
These stocks have been absolutely crucified by what has been going on in the banking and mortgage markets. It is true they are in big trouble but not as much as the market has implied.
He adds that small-caps saw dramatic falls in 2007 and 2008 but this led to many value opportunities, particularly in the financial sector, so he made moves to take advantage of this earlier in the year.
Over the year to May 1, the fund was ranked fourth out of 14 funds in the European Smaller Companies sector, according to Morningstar. It lost 25.18% compared with the sector average fall of 31.16%.
We should be asking if the market fell too far. Companies were priced for Armageddon or insolvency. Some companies will go bust but it is very rare that many go bust and certainly not as many as the market implied.
Historically the fund has not had a high exposure to financials but at those valuations the companies met the funds criteria to invest.
He added positions in Banco Popolari, Hellenic Bank, Irish Life and Bank of Ireland to the fund.
Even though some of these have gone above the 3 billion (2.6 billion) market capitalisation level that is normally the limit on the fund, Wiseman says he will not be selling as the investment potential is still strong. Some of these stocks have seen a share price increase of 300% since they were bought in January.
Wiseman admits the move into financials was about a month early, but in April when the market reversed, with a large chunk of the falls in financials, the fund benefited.
He has already started to take profits on some of the cyclical stocks he has bought, as he feels they maybe overshooting on the way up as they did on the way down.
I now think the market will move sideways in the short term, but in 12 months time if will be in the upward direction. In this case, we would expect to remain overweight financials.