Mark Dampier: The Analyst
Steer clear of those falling torpedoes
Saturday 28 June 2008
As I write, the UK stock market is heading down towards the lows it reached back in March. Whether we will see another bounce up from that level I have no idea, but the trickle of bad news is becoming more like a torrent. There is little doubt that we are going to be in for a difficult time for the next couple of years.
The main problem stems from the housing market, which is so important for the UK economy. The upshot of this is that it becomes even more important to find quality fund managers who are doing something a little different with their portfolios and following their own ideas. One such is Tim Steer of the New Star UK Alpha Fund. It is fair to say that within the New Star UK team he shines like a beacon.
Before joining the firm he was a highly rated analyst at Merrill Lynch, with a reputation for avoiding "torpedoes", or disastrous stocks, through very diligent reading of their accounts. Over the years, his excellent insights into these have paid off, and he has continued to have success since joining New Star. His fund avoided the internet gambling stocks, commercial property stocks before the major falls and he has not been in banks during the recent troubles.
A few years ago his portfolio was very focused on UK domestic companies, but he now only has 30 per cent of the fund invested in these areas. The rest has more of an international feel; you will find him invested in themes covering power generation and conservation, infrastructure and outsourcing, as well as the engineering, defence and mining sectors.
His biggest exposure is in defence, with a weighting of about 17 per cent; holdings here include Meggitt, which is more than 3.5 per cent of the portfolio, as well as BAE Systems and Rolls-Royce. All of those have something in common: strong order books. This is something that Mr Steer believes will help insulate them from the ongoing economic problems.
Many larger companies have overseas exposure, consequently 65 per cent of the fund is invested in these companies. Clearly the world's big growth area is Asia, and emerging markets generally, which altogether accounted for almost half of the total economic growth in 2007. Given that recession in the US, UK and Europe is almost a certainty now, firms with exposure to the high growth areas will come even more into favour.
An example of one such company that Mr Steer holds in the fund is Aggreko, whose business is the portable electricity generators that are greatly in demand in places like Africa that do not yet have a comprehensive power network.
In current stock markets you want to avoid the torpedoes because they will surely sink you quickly. The mining, oil and gas sectors account for approximately 15 per cent of the portfolio. Significant positions are held in Rio Tinto, BHP Billiton and Xstrata. Within oils he places particular emphasis on stocks such as Lamprell, which has unique and high quality oil service capability.
So what are some of the torpedoes? House builders have been clobbered due to the ongoing property crash, but Mr Steer sold his investment in them a long time ago. However, it doesn't stop there. The point he makes is that the house building industry has a huge supply chain from construction workers through to furniture makers, removals, DIY and retailing. So there is a huge knock-on effect throughout the economy. The cost of utility bills, mortgages and petrol are all going to make the domestic sector a much harder one in which to make profits.
However, there are still pockets of value if you know where to look. One example is Game Group, the specialist retailer of PC and video games. The company has had a very strong year because of their niche position. Discretionary spending on computer games has stayed strong, in large part due to Nintendo's innovative and popular products.
What is more, Game Group has a strong balance sheet and low debt, which is just the sort of thing Mr Steer likes in a stock.
Unlike many UK fund managers, Tim Steer has proved to be flexible and pragmatic, showing a real willingness to change the portfolio to suit market conditions and themes. While times may be tough in the UK market, opportunities are always thrown up. It is only a few fund managers, such as Mr Steer, who seem able to not only find many of the winners but, just as importantly, to avoid the losers.
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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