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Watch out for momentum

Iimia has warned against “dangerous” momentum-driven investing, saying that multi-managers can be caught out by rapid changes in market sentiment.

The company believes the best potential returns come from unloved or undersold stocks. In February, it invested in Investec’s global energy fund at a time when commodity companies, such as BHP and Rio Tinto, were oversold due to concerns about the US housing market.

This led to a fall in share prices but Iimia believed the setback in the US was not as fierce as the consensus view.

It also felt the biggest driver for growth in commodities was demand from emerging markets including China.

Iimia says it is now reaping the rewards as the Investec fund has risen by more than 20 per cent since late March, exceeding expectations and proving how quickly market sentiment can turn. It is now investing in the unloved technology and Japanese smaller companies, which are being indiscriminately sold.

Fund manager Richard Scott says: “I rarely sell out of something just because of poor momentum. It is dangerous being a momentum-driven investor. As is the case with commodities, it can surprise you how quickly things turn around. To buy companies that you think a private equity company will bid for is a dangerous game.

“Companies were falling over themselves to set up tech funds in 2000 but, seven years on, people are giving up just as valuations are cheaper and prospects look good. Both tech and Japanese small caps are likely to get worse before they get better but we think they will improve over the next 12-18 months.”

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