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Unlove story

Lack of any single, strong, identifiable investment theme today is leaving many investors scratching their heads wondering which way to go. Corporate bonds were certainly all the rage in the first quarter but equities have posted greater returns in recent months and are starting to tempt investors back in. But where should they go? Will there be another correction that makes it more appealing? Should they wait?

What is the right call in a temperamental market, where there are few themes and a myriad of different economic indicators all providing conflicting information? It seems that these days there are far more ques-tions than answers. The investment world may look sturdier than this time last year but it does not look a whole lot easier to navigate.

Stephen Westwood of Nils Taube Investments says: “Indicators are far from clear-cut. Equities should discount future growth and, if the recession is nearly over, corporate earnings return to a reasonable growth path and some inflation is allowed into the system, then holding equities is correct. Cross-referencing, we see that equities do not look expensive relative to bonds or cash. Against this is the fact that equity prices have moved a long way from their low points and do appear overbought on a short-term view. It is a conundrum.”

There are those who are convinced we are still in recession and then there are those who believe we are back to growth and the inflation versus deflation debate continues unabated. Fund selection in such a market will depend heavily in which camp an adviser believes most.

Even the contrarian managers do not appear truly contrarian in such a directionless market. After all, if there is little agreement on macro issues, there is even less consensus on sectors and stocks. Of late, many managers have said they are looking more at the previous unloved areas of the market. But what exactly constitutes unloved these days? To some, this is financials while to others it is companies such as the oil giants or pharmaceuticals. What is unloved by one manager may be different to another, making almost every manager a contrarian at this point.

Within the UK all companies sector, there are 129 funds with a financials’ weighting exceeding 20 per cent of their fund and six with weightings higher than 30 per cent, according to data from Financial Analytics. On the flip side, there are 35 funds in the IMA’s UK all companies peer group with a sector position of under 10 per cent in financials, many of which are opportunities funds. Funds such as M&G recovery, Slater recovery, Majedie UK opportunities, Invesco Perpetual UK aggressive, Walker Cripps UK growth and Cavendish UK opportunities are all light on financials, according to their latest factsheet data held with Financial Analytics.

Considering how big a part the oil sector is in FTSE 100, there are some portfolios taking big underweight positions, with 45 funds in the all companies sector holding less than 10 per cent in the sector overall. A total of 62 funds of 320 have a weighting bigger than 20 per cent in oil and gas and none has exposure exceeding 30 percent.

Which sector is truly unloved at the moment – financials or oils? At the end of August, Fidelity’s Anthony Bolton said he believed markets were ripe for a multi-year bull run. He is favouring unloved stocks as well as sectors that are under-valued in this market such as technology and financials stocks, shorter-term consumer cyclicals and value stocks. He is cautious about commodities and industrial cyclicals.

He says: “Consumer cyclicals and value stocks have a very good record of leading most market recoveries but I would be inclined to shift from these sectors into growth stocks over the medium term. Technology stocks also look interesting to me and, more contentiously, financial stocks are appealing. They led the downturn and they have led the upturn.”

On the other hand, another well known contrarian is Hugh Hendry, manager of Eclectica Continental Europe fund, who is bearish on equities overall and favours government debt. Within equities, Hendry says he eschewed the “scintillating returns on offer from the weakest or most cyclical businesses and am disinclined to chase a market which has risen more than 60 per cent over the past six months on a change in social mood. Instead, we prefer the rock-steady assuredness of mega-caps.”

Then there are those managers sitting in the middle of the increasingly divergent views, taking their own barbell approach to the opportunities in today’s market. JOHIM manager Russell Wallis, who runs the Waverton UK fund, has recently broadened out his large-cap portfolio, taking some money off his successful cyclical positions in favour of higher-yielding defensives.

“We have become less sector-specific and broadened our positions, much as the market has done. The market will come back and reward defensive areas, those stocks with reliable dividends, producing higher yields and with earnings outside the UK such as BP and Glaxo. Looking ahead, I would be wary of being outside these stocks. People are starting to invest again but when they do put money into the market, they will feel worried about chasing areas that have already risen,” he says.

Axa Framlington UK growth manager Jamie Hooper echoes this sentiment and he too is looking more neutral. He says: “As we enter the next phase of market recovery, then we move from beta back to alpha, from macro to micro. The portfolio now enjoys a balanced tilt, looking for quality companies with above average growth prospects. In essence, it is back to good old-fashioned stockpicking.”

In a market where so much appears uncertain and such divergent views are rampant, fund selection is even more difficult than during the downturn. Advisers should perhaps consider mixing and matching or constructing a barbell approach through fund selection.

Picking the pro-growth managers alongside the extreme defensive hedges the bet that one is right and the other is wrong. If you cannot see a direction, cover all bases – or so the theory goes.


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