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Staying ahead of the game

The US is once again in the driving seat of world market growth and looks set to continue to expand as it has less competition for capital, particularly from Japan.

Weaker world trade prices should help to control the US consumer price index. The Federal Reserve is adding to this by reducing the volume of money available to the economy.

Asia and the rest of the emerging markets are likely to suffer as all export markets weaken and the emerging countries&#39 ability to finance their not inconsiderable debt burden declines. This scenario implies that asset markets can make further progress.

Schroder head of investment strategy David Gasparro is sceptical about the extension of the business cycle in the US as he believes inflation is now in the pipeline, necessitating further action by the Federal Reserve.

He believes investors remain confused by the state of the economy and the jury is undecided about the speed and scale of any slowdown. Given such an uncertain economic background, Gasparro has decided against an aggressive asset allocation strategy and has largely returned to benchmark in terms of positioning compared with the MSCI index.

He has been increasing the weighting to defensive sectors such as healthcare and consumer staples at the expense of technology and telecommunications. In all sectors, his focus is now firmly on the highest-quality blue-chip names.

The limited range of funds which Forsyth Partners feels happy to rate in the global equity universe reflects the poor consistency of many funds that we review.

The Mercury ST global equity fund managed by Neil Beaton is one of the few with a definitive investment process and a global investment team supporting that process. Global research is conducted internally, with a representative of the regional teams actively investing within the global equity group.

As head of the global equity team, Gary Lowe remains the arbiter of asset allocation strategy for the group but the target for the fund remains one of 2-3 per cent outperformance of the benchmark on a rolling basis.

The fund is cautiously positioned, with only limited active risk in terms of asset allocation and sector selection. Beaton suggests we have entered the necessary slowdown phase in the US that will see some of the excesses removed without serious damage to the underlying picture of profitability for corporate America. Europe remains well supported by merger and acquisition activity although there is increasing concern that economic growth in the region will be undermined by further monetary tightening.

The prospects for Japan have been undermined by evidence of an economic slowdown at the start of a nascent recovery and limited stockpicking opportunities.

Mercury has moved to an underweight position across the region as weakness in Japan filters through to a slowdown in other Pacific-based economies. Beaton expects little in the way of excitement in the next three months, with investors likely to turn increasingly cautious as the consequences of a global economic slowdown are digested.

Giles Worthington, manager of the Invesco GT global enterprise fund, continues to favour growth companies in the new industries, confident that only the strongest players demonstrating sustainable growth will survive in the current deflation ary environment. Given the extent of pricing pressures, Worthington suggests the winners will be those companies operating in a niche position with a strong brand presence or those that are the best operators globally.

Only companies with high barriers to entry, a strong management team and sustainable growth are likely to succeed.

Despite the downturn in investor confidence, Worthington has made few changes to his portfolio in the last quarter, maintaining positions in the telecomms, technology and media sectors as he finds it increasingly difficult to find growth outside the technology sector.

Despite the fund&#39s recent underperformance, Worthington is content that investments are in the “best performers”. He makes substantial efforts to find attractive companies early and, although he will question short-term valuations, his outlook remains long term. He has used the recent market volatility to trade and buy on weakness.

Louis Bernstone took control of the Baring world opportunity fund after Mark Latham&#39s departure in April. Bernstone&#39s background is in information technology, where he initially began his career, and he was instrumental in the creation of the quantitative model used by the European team to such good effect after 1996.

He does not profess to have anything other than theoretical expertise in options and futures strategies but says the central message of the underlying portfolio has not been diluted and the investment objective is still the same, namely to provide an absolute return at a lower level of volatility than the index.

The underlying resources applied to the portfolio will be constant but Bernstone believes he will be more transparent than Latham. He is also uncomfortable with the long tail to the fund, which was a feature of Latham&#39s investment style. The portfolio&#39s protection will be provided by shorter-dated options and Bernstone will short the index he is overweight in rather than other indices, which increases the active risk in the broader portfolio.

The portfolio will still be driven by three key themes – “the brand”, “transparent technology” and “chips with everything”. The brand refers to the need to maintain and enhance brand recognition on the internet given the intense level of competition it creates. Transparent technology refers to the worldwide web and the portability of data moving forward.

Chips with everything reflects the accelerating demand for embedded technology and the prospects for strong demand for at least the next 12 to18 months.

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