Mark Dampier: A glimmer of optimism in equities

The Analyst
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The Independent Online

Standard Life does have an investment process that uses their proprietary stock ranking tool they call "the matrix". It looks at 12 factors that influence share prices, however like many statistical models it tends to be somewhat less effective around market turning points. So in this instance it won't be used as a major determining factor for this fund, which looks to benefit from any recovery in the UK stock market from current levels.

The qualitative aspect of Standard Life's process is built around a focus on change. Basically Standard Life tries to spot changes in company expectations early and therefore benefit from any share price appreciation. This approach should be well suited to highlighting shares that could benefit from an improving economic backdrop.

Plenty of shares have fallen dramatically – many by more than 80 per cent – but crucially the bad and the good have fallen together. Those companies with large cash positions are in an extremely good competitive position for the future, yet in many cases their share prices have still been hammered. This fund has a bias towards cyclical companies, in other words those which are economically sensitive. You might think this is completely crazy right now, but given Mr Cumming's view that the bad news is already reflected in share prices just a small change in expectations could really lift share prices.

Mr Cumming simply believes that too many stocks are too cheap right now and that a level of 3500 on the FTSE 100 is pretty much the low point. Refinancing through rights issues is putting companies back into a stronger position and overseas investors looking at the UK can now get an awful lot more for their money given sterling's depreciation. In addition, he sees demand gradually picking up in China and the first inkling of stabilisation in the US housing market.

An example of a holding in the portfolio is Great Portland Estates, a company with a strong balance sheet enabling it to take advantage of a potential turn in the commercial property market. Another holding, Thomas Cook, is taking advantage of the fact that the four main tour operators are consolidating down to two and therefore there are significant efficiency gains to be made.

Others include Compass Group, where management has been exceeding expectations for quite some time and the business has proven to be far less cyclical than the market had originally thought.

The fund will initially have little exposure to traditional defensive sectors such as utilities, beverages and tobacco. This makes it a radically different portfolio to a fund like Invesco Perpetual Income and could dovetail nicely with it. Mr Cumming has 26 years experience in the markets, but this is his first venture into retail fund management. I find this particularly interesting as he has no need to put his reputation on the line in this way. Through speaking to him it is clear he has high conviction in the fund, and has invested a considerable amount of his own money into it. While this is not a guarantee of success I cannot help but be impressed by that level of commitment.

This fund should appeal to anyone who believes the worst is behind us. If that proves true then this should be one of the leading UK funds over the next couple of years. However, if Mr Cumming's optimistic view is wrong then this fund is likely to suffer significantly. It's certainly not a fund that will let you sleep easily at night over the next few months, but at least investors will know what they are getting themselves into.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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