If you read my comment last week, you will know that I am fairly gloomy on the state of the UK economy. The question is, how much of the bad news is already reflected in the market? Back in March, the market seemed to be priced for the very worst outcome. The rally since then has been based largely on the fact that things are getting less worse. Companies that were expected to go bust have been brought back from the brink, notably the banks.
The three managers of these funds are all optimistic on the market but are definitely not bulls of the UK economy. So, contrary to what you may think, they are perhaps not quite as far apart from Neil Woodford’s position as you might think.
The Standard Life recovery fund was launched near the low point of the stockmarket in early March. David Cummings, head of UK equities at Standard Life, has had a fantastic spell, with the fund rising by over 50 per cent. In the last week, he added even more of his own money to the fund, believing the market can hit 5,000 by the end of the year. He does not expect to see it below 4,000 again. The Standard Life team are relatively upbeat, seeing many opportunities coming through their door every day. Bear in mind they manage over £30bn worth of equities so have considerable expertise.
In January, I highlighted the Schroder UK alpha fund. The fund had experienced a fairly torrid time and its weighting in banks had been detrimental to performance. However, since then, it has rallied very strongly and in a recent meeting with Richard Buxton, I found him optimistic on his portfolio. He has been trimming his holdings in banks and other successful holdings include Next, Home Retail and Reuters but he has not sold any completely. He believes, like David Cummings, that we have seen the low point and we are in a trading range.
He thinks the real test will come in the autumn when we will see whether company orders are really picking up. Into next year, he believes that GDP growth will not be much more than 1 per cent and it could even be less but either way it is going to be a tough environment. It is here that his stockpicking abilities will come through. He thinks there will just be a few winners and his portfolio is concentrated at 32 stocks. He is looking for companies with good earn- ings’ visibility that will grow through a tough economic environment. These include Experian and BG and he has also been buying Glaxo which he views as far too cheap. That leads me neatly on to the new Old Mutual UK dynamic equity fund, where I have found the manager, Luke Kerr, in a similar frame of mind. However, this fund does have slightly more ammunition in that it can also short. It is not an absolute return fund, in fact, it will have the characteristics of a long-only fund but with some defensive qualities when the market falls.
This is Old Mutual’s best ideas portfolio, so it has a hunting ground across market capitalisation but their real expertise and where they find the most opportunities do tend to be the mid and small-cap area.
The fund is also likely to be limited in size at around £200m. This is a fund to take a look at sooner rather than later as I believe the team behind it is one of the strongest in the City. In the meantime, expect a volatile summer.
The trading volumes give rise to exaggerated price movements. After such a strong rally, profit- taking and consolidation is likely to continue but many missed the market rally, so if economic news is not too grim, some of the cash on the sidelines may well enter the market, helping to underpin it.
Mark Dampier is head of research at Hargreaves Lansdown