Adjust your horizons for a new view of the City

Feeling confident that shares will keep rising? Sam Dunn finds out how to rejig your investments to take advantage of recovery

After three years of financial misery and economic pain, the City is starting to talk tentatively about recovery. But the messages have been mixed: while the FTSE 100 rose 8.65 per cent last month – the biggest monthly rise since September 1997 – and crept over 4,000 last week for the first time this year, many experts are wary of assuming that this is the end of the bear market.

After three years of financial misery and economic pain, the City is starting to talk tentatively about recovery. But the messages have been mixed: while the FTSE 100 rose 8.65 per cent last month – the biggest monthly rise since September 1997 – and crept over 4,000 last week for the first time this year, many experts are wary of assuming that this is the end of the bear market.

Tony Dolphin, director of global economics and strategy at fund manager Henderson, foresees little change in the FTSE 100 over the coming months, predicting it will finish the year at 4,200. And despite evidence of a pickup in retail sales, the Confederation of British Industry and the British Retail Consortium report continued weakness.

Despite these sober views, there remain several options for those who feel the bear market has bottomed out and want to take advantage of recovery, when it arrives.

The first step is to look at your portfolio and see whether any changes should be made, particularly if some investments seem to be letting you down. Kerry Nelson, independent financial adviser (IFA) and director of financial consultancy Onevoice, says: "This is critical. You need to ask if the performance of your funds is down to the poor economic landscape or poor manager performance. Compare your funds to others in the sector, and if you find yours have done far worse, ask why."

It is a fairly straightforward process to tweak your portfolio so that it is better suited to general economic growth. The FTSE 100 tends to lead the way as the economy picks up, and funds investing in blue chip companies could be a good place to start, suggests Mike Owen, managing director of IFA PlanInvest. However, he recommends a spread of investments to catch different levels of anticipated growth, as smaller businesses can often react more quickly to a change in economic conditions.

"As well as blue chips, you could see some medium-sized companies pick up quite sharply. You could also put some money in smaller company funds to participate in a recovery," he says. "It's not clear what's going to happen, so spread your risk. If you are a little risk averse, go for blue chip funds with recognisable companies such as Cadbury Schweppes."

To this end, Mr Owen backs funds such as Lazard UK Alpha or the Cazenove UK Growth and Income. Alternatively, he suggests, try the Schroder Mid-250 fund, which invests in smaller firms.

In contrast, Ms Nelson pre- fers funds focusing on stock selection because they allow managers to pick companies they believe have the potential for robust growth, and to act quickly to take profits.

"Rather than blue chip investments, it's far better to go for stock selection," says Ms Nelson. "Some of the FTSE recovery will be quite slow – it's still very much down to individual companies. That's where the value is, and some of the economic data is not very positive at all."

She recommends the BWD Aggressive Growth fund and the DWS UK Growth fund.

If you had the foresight to reduce your equity exposure two or three years ago and go into cash or bonds, you might want to call a recovery now and see if you can benefit from a switch into riskier assets.

Gavin Haynes, investment director at IFA Whitechurch Securities, says: "If you have been shrewd enough during the past few months to have cash weightings and fixed interest, you could look to reduce that and increase equity exposure.

"Also, if you have been with gilts and corporate bonds, you can stay with bond funds but choose a high-yield bond fund instead, which is slightly more risky. You need to get more risk [into your portfolio] to get the returns."