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Managers divided on rally run

Investment trust managers remain cautious over the sustainability of the recent market rally.

Association of Investment Trust Companies&#39 statistics show that the UK growth and smaller companies sectors are up by 1 and 7 per cent respectively over the last six months.

In the last two months, the AITC says UK smaller companies have outperformed the UK growth sector over a one-year period for the first time since September 2002.

But Keystone investment trust manager Mike Barnett says he remains cautious and is weighting his portfolio with more defensive areas of the market, including utilities and tobacco.

He says: “I do not believe that the market rally is sustainable. Recent strength in the economically sensitive areas of the market has run too far.

“I retain my long-held view of a sustained period of sub-trend economic growth exemplified by a lack of pricing power, overcapacity and high levels of corporate and consumer debt.”

But Finsbury growth trust manager Nick Train believes UK equities are still undervalued. He says: “UK equities either need to offer a dividend yield of 4 per cent gross or need to trade on an earning yield of 4 per cent for a price/earnings ratio of 25.

“Today, we are of the opinion that there are sufficient growing companies within the FT AllShare index to justify the price/ earnings ratio target, meaning that UK stocks are perhaps 35 per cent undervalued.”

AITC communications director Annabel Brodie-Smith says: “It has been a long, hot summer and the prospects for equity investors have certainly brightened during its course. One-year performance figures are now in positive territory. However, we need to see continued progress before this improvement is reflected in the three-year and five-year figures.”

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