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Steer hunter

We all make mistakes in fund selection. One of my worst was putting Tim Steer’s New Star UK Alpha fund on hold a few years ago.

Steer was a top-rated analyst at Merrill Lynch and our in-house quant screening led us to take too negative a view of him.

However, he has since thrived while many of his colleagues on the UK desk at New Star have had a disastrous time.

He has proved to be exceptionally adaptive and flexible and we will look at adding his New Star UK alpha fund back to our Wealth 150 list.

As I write, the UK stock-market is heading down towards the lows it reached in March. Whether we will see another bounce up from that level I have no idea but the trickle of bad news is becoming more like a torrent.

There is little doubt that we are going to be in for a difficult time for the next couple of years.

The main problem stems from the housing market, which is so important for the UK economy.

The upshot of this is that it becomes even more important to find quality fund managers who are doing something a little different with their portfolios and following their own ideas.

It is fair to say that within the New Star UK team, Tim Steer shines like a beacon.

He joined the firm having gained a reputation for avoiding torpedoes, or disastrous stocks, through very diligent reading of their accounts.

In current stockmarkets, you want to avoid the torpedoes because they will surely sink you quickly. Over the years, his excellent insights into these have paid off and he has continued to have success since joining New Star.

His fund has avoided the internet gambling stocks and commercial property stocks before the major falls and he has not been in banks during the recent troubles.

A few years ago, his portfolio was very focused on UK domestic companies but he now only has 30 per cent of the fund invested in these areas.

The rest has more of an international feel. You will find him invested in themes covering power generation and conservation, infrastructure and outsourcing, as well as the engineering, defence and mining sectors.

His biggest exposure is in defence, with a weighting of about 17 per cent. Holdings here include Meggitt, which is more than 3.5 per cent of the portfolio, as well as BAE Systems and Rolls-Royce.

All of these have something in common – strong order books.

This is something that Steer believes will help insulate them from the ongoing economic problems.

Many bigger companies have overseas exposure, consequently 65 per cent of the fund is invested in these companies.

Clearly, the world’s big growth area is Asia, and emerging markets generally, which altogether accounted for almost half the total economic growth in 2007.

Given that recession in the US, UK and Europe is almost a certainty now, firms with exposure to the high growth areas will come even more into favour.

One such company that Steer holds in the fund is Aggreko, whose business is the portable electricity generators that are greatly in demand in places like Africa that do not yet have a comprehensive power network.

The mining, oil and gas sectors account for about 15 per cent of the portfolio. Significant positions are held in Rio Tinto, BHP Billiton and Xstrata. Within oil, he places particular emphasis on stocks such as Lamprell, which has unique and high quality oil service capability.

So what are some of the torpedoes?

Housebuilders have been clobbered due to the ongoing property crash but Steer was sold his investment in them a long time ago. However, it does not stop there.

The point he makes is that the housebuilding industry has a huge supply chain, from construction workers through to furniture makers, removals, DIY and retailing. So there is a huge knock-on effect throughout the economy. The cost of utility bills, mortgages and petrol are all going to make the domestic sector a much harder one in which to make profits.

However, there are still pockets of value if you know where to look.

One example is Game Group, the specialist retailer of PC and video games. The company has had a very strong year due to its niche position. Discretionary spending on computer games has stayed strong, in large part due to Nintendo’s innovative and popular products.

What is more, Game Group has a strong balance sheet and low debt, which is just the sort of thing Steer likes in a stock.

Times are clearly tough in the UK market and will continue to be so for quite some time while a huge deleveraging takes place.

The ability to spot the next trouble spot is arguably more important than just finding winners.

Tim Steer is one of just a few managers doing a great job at both.

Mark Dampier is head of research at Hargreaves Lansdown

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