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The shape of swings to come

Hannah Stodell reports that fund managers are split on the strength or otherwise of the market rally

Fund managers’ positioning of their portfolios varies as markedly as industry predictions about the shape of the economic recovery.

Hargreaves Lansdown senior analyst Meera Patel says the firm has seen a more pronounced dichotomy of late between fund manager market sentiment.

She says: “We are seeing a greater divergence in fund managers sitting in different camps, with some going defensive and others who are really bullish. Argonaut’s Barry Norris is still in the bullish camp and has his portfolio positioned that way and at the other extreme you have got people like Neil Woodford.”

Last month, Norris tipped cyclicals as the more attractive option ahead of defensives. He said he understands why people who are invested heavily in defensives would choose to sit on them and he will eventually look at them once cyclicals look fully valued.

After being very vocal earlier in the summer about suggesting there would be a V-shaped recovery, Norris says everything they have seen since has strengthened that argument.

He says: “Those who have argued on no recovery or no V-shaped recovery have been totally behind the curve and proven to be wrong.

“Ultimately, there are managers who still believe in an economic cycle and therefore believe we are in a recovery stage of the cycle and those who think this time it is different, we will not have a proper cycle and either there will be no recovery or the recovery will be unsustainable.

“To our mind, the stockmarket is still not pricing in a normal economic recovery so the skittishness of the market at the moment is offering those who missed the first recovery rally a second opportunity over the next few months.”

Norris’s comments are in stark contrast to the comments of fund firm Newton which recently said at a City round table on the global outlook for 2010 that its defensive stance would stand it in good stead for whatever recovery shape emerged.

Newton’s Ben Russon said he was seeking out opportunities in non-cyclical parts of the UK equity market and staying clear of financials and stocks with domestic consumer exposure.

He said: “We are not out of the woods yet in terms of economic recovery. There are many stocks from the UK equity market pricing in a much rosier economic environment than we think is likely to emerge.”

Head of distribution Paul Feeney said: “We may lag a little bit but if we are right to be defensive and if we are not out of the woods, then our investors will do far better than those who place all their money on black.”

Patel says: “We have had such a huge recovery in the cyclical stocks that were hit the most in the downturn and it has left the more defensive companies behind in the rally. The fund managers who are a bit defensive and cautious seem to be saying we have had this big rally and it is time to see other sectors re-rated. We are not seeing consistent economic data so there are still mixed signals and that uncertainty is what is causing some fund managers to be really cautious.”

Fidelity International head of UK retail sales Peter Hicks says: “If you look forward, there is a good argument that things are moving in the right direction with the recovery and so the degree of difference in views is probably regarding the strength of recovery.

“There does seem to be quite a big difference in the market about which type of stock and sector to invest in and that is probably borne out by the amount of dispersion that is in the market as well.

“You can look in the same sector and find two stocks that are valued quite differently to one another and this is a good advantage for stockpickers. I think the different views that we are seeing in the market are different interpretations of whether you should buy stock A or stock B.”

Chelsea Financial Services managing director Darius McDermott says: “I think it is very difficult to call the direction of the market. As I do not know, I am happier sitting on the fence but I have felt if the market was going to continue to go up, it would have to be a broader rally, so not just the cyclicals and banks.”

City Asset Management research director James Calder says: “We think in the short term that the market is likely to continue in an upward trend but we are telling clients there are still problems out there so we would probably go in the more cautious camp.

“If the market were to fall by 5 or 10 per cent, the question people ask themselves is not if they are going to jump in but is it going to fall by another 5 per cent or 10 per cent? I think there are probably a lot of people out there that are staying in cash but, from our perspective, people should have a balanced portfolio across a number of asset classes.”


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