Fund managers have been moving down the market capitalisation scale as they search to take on more risk in their portfolios in what could be the first step of a recovery.
After backing defensive stocks, which traditionally fall into the FTSE 100, managers have been rotating into mid-caps – which many say will lead the markets from a bear to a bull rally.
Mark Pignatelli, the manager of the Smith & Williamson European Growth Trust, increased exposure to mid-caps when he took over the fund late last year, and Bill Mott and Neil Cumings at PSigma picked up mid-caps over the winter.
Andy Brough (pictured), the manager of the Schroder UK Mid 250 fund said in recent weeks his fund has benefited from income managers, who traditionally hold large-caps, moving into his arena in search of yield.
Gavin Haines, the managing director of Whitechurch Securities, says he is not surprised by these moves, as the FTSE Mid 250 has a larger exposure to cyclical areas.
“A lot of fund managers have been very overweight in defensives and as they start to rotate out, which they appear to be doing as defensives are looking expensive, this naturally results in a move towards the Mid 250.”
Pignatelli says cyclicals tend to outperform at this stage of the cycle and will recover faster coming out of a downturn, so it is no surprise more managers are moving into this area.
Those that did move into medium-sized companies earlier in the year will be happy with the results so far. Since the market trough on March 9, the Mid 250 is up 36%. Cummings says the UK Growth fund he runs and Mott’s Income portfolio are now “flying” after a hard time holding mid-caps at the turn of the year.
“It was a long dark winter which saw mid-caps, with what we felt were sound fundamentals, see their share prices collapse on trading and balance sheet fears and short sellers hammering prices down.”
This was detrimental to performance but, more recently, as government measures have begun to feed through, optimism has improved, says Cummings.
“People’s risk appetite has dialled up from minimum to maximum since April and short positions have been closed.
“There is now a shortage of stock as there are no willing sellers, causing a tremendous swing in the fortunes of these stocks.”
Although there are concerns that the rally in mid-caps will not continue upwards in the short-term, most agree the long-term prospects will remain attractive.
Haines says volatility is likely to return in the summer, as is normally the case, but he expects managers to pick up more mid-caps during this time.