Mark Dampier: Stock up with Leggett to benefit from a relief rally
Saturday 30 June 2012
Given the macroeconomic backdrop, most articles you read at present are about preserving capital. For many, cash is still king. For others, more cautious strategies remain popular, including such funds as Invesco Perpetual Income, Troy Trojan or Miton Strategic Portfolio to name but a few.
I agree it is perfectly sensible to have some of these funds at the core of your portfolio. The world is at a most uncertain point. At the moment the focus is on the eurozone, but it could easily be on China where growth is slowing. I also detect signs of the US economy softening too.
Yet it is not right to have all your investments pointing in one direction. I have often talked about dovetailing different investment styles to give you a greater diversification.
For example, looking at JO Hambro Income alongside Invesco Perpetual High Income fund as relative performance will differ according to market conditions.
Now let's suppose that at some stage there is greater clarity in the global economic picture. Suddenly the markets could surge and many defensive investments left behind. In particular, those holding too much cash will have missed out.
So if you feel you are insufficiently exposed to the stock market what do you buy? Well one fund I would consider would be Standard Life UK Equity Unconstrained run by Ed Leggett. At present, it has a high "beta" to the market of 1.8. In other words, if the market moves strongly upwards it should go by far more – typically it offers nearly double the volatility. Look back at periods when the market has had a risk-on appetite and you will see this is often one of the top-performing funds.
The manager, Ed Leggett, classifies stocks into five main areas:
First, he looks at structurally challenged businesses such as Trinity Mirror where the market is unsure whether it will be around in five years' time. He has little exposure to these types of companies.
Second, blue-chip defensives perceived as having their best growth behind them. These include BT and GlaxoSmithKline where the equity can be viewed as an attractive alternative to holding the corporate bonds of the firm due to strong earnings and a high yield.
Third, defensive businesses with more growth to come, often from emerging markets. These are not cheap relative to the market but perhaps inexpensive relative to their own histories. He remains underweight this group.
The fourth area, which forms around 60 per cent of the fund, is invested in economically-sensitive, cyclical companies operating in areas of structural growth. This includes most industrial and media firms where he sees lots of opportunities to buy good-quality businesses on low price-to-earnings ratios of around eight times with yields of 4 to 6 per cent.
They often have strong balance sheets where firms have used the last few years to pay down debt and build up cash. However, they remain sensitive to the economic cycle so they make the fund quite volatile;
Finally, he looks at some recovery stocks, which may have unclear, long-term growth prospects. These are particularly depressed areas including banks, house builders and property firms. They are not a large part of the portfolio, but he does have selected names.
Mr Leggett isn't complacent. He accepts that if we get a Lehman-type event, as we saw in 2008, earnings will fall and share prices too.
However, a real opportunity is possible if solutions to the current problem emerge. This would immediately lengthen investors' time horizons and we would see a re-rating of many shares based on greater certainty of future earnings.
While this fund is highly volatile, that is not its objective. Rather it is a function of where Mr Leggett and the team at Standard Life see the best opportunities. Throughout the sharp falls in the market, he has stayed faithful to this portfolio remaining bullish on its prospects.
So for those of you looking for an investment to buy ahead of a relief rally, this is definitely one you should have on your list.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.h.l.co.uk/independent
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