The years following the financial crisis have been uneasy for investors and fund managers alike. Wider economic, or macro, concerns have dominated news flow. These issues can be worrying, yet the interpretation of macroeconomic events by many commentators has been wrong.
A few years ago, amid the introduction of quantitative easing in the US and the UK, many experts suggested the strategy would end in a huge dose of inflation. Some might suggest the experiment is hardly over. Yet so far, there appears to be a greater concern over the risk of deflation. Furthermore, investors have switched from being bullish to bearish at a stroke, meaning stock markets have gyrated frantically at times. Corrections of up to 10 per cent are becoming the norm.
It takes a courageous fund manager to steer their way around such a chaotic environment. One who gets my vote is Ed Legget, manager of the Standard Life UK Equity Unconstrained fund. He has maintained his belief that the world is not about to end, even through the hardest times. At some of the lowest points, wider economic concerns had already been discounted into share prices. All that had to happen was for things not to get much worse.
I recently caught up with Mr Legget; while he does not ignore the macroeconomic environment completely, he tends to view the glass as being half full rather than half empty. At present, he is positive in his outlook for the US, where companies are reporting good earnings. He believes the deflation we are seeing is good deflation; it is a result of oversupply rather than weaker demand. Therefore, it acts as a big kick for consumers. For example, once the recent fall in the oil price feeds through to the consumer, it will put an extra $600 (£380) to $700 a year into their pockets. This is especially important at a time of little wage growth.
Meanwhile, he concedes confidence in Europe is low. He argues there has been limited reform so far, while problems in Russia and an economic slowdown in China have not helped. The reaction of policymakers to these problems has been to push rate rises further into the future.
Further measures in Europe should not be ruled out. Indeed, the day I met Mr Legget, Sweden reduced its interest rate to zero.
On stock selection, the manager believes the valuations of many of the more defensive areas of the market are quite extreme. As such, there is a large valuation gap between defensive stocks and more economically sensitive, or cyclical, sectors. In his view, the valuations of many UK domestic companies have fallen too far this year. The balance sheets of many are much stronger than they were a few years ago, with some offering an attractive yield. While income is not Mr Legget's prime concern, the fund is currently yielding a healthy 3 per cent.
The manager has recently increased the fund's exposure to the UK consumer. This has been achieved through housebuilders, such as Crest Nicholson and Taylor Wimpey, as well as the travel group TUI Travel. Within the industrials sector, he has added to his position in the engineer GKN, taking advantage of recent share price weakness.
To sum up, Mr Legget sees a significant divergence between many parts of the stock market. This is providing an excellent opportunity for truly active stock pickers. In his view, wider economic issues are actually clearer than they have been during previous periods of stress. He feels the domestic UK economy has been written off far too soon and too easily.
The UK equities team at Standard Life is a strong one. It remains a surprise to me that Mr Legget is still relatively unknown, given the exceptional performance of this fund under his stewardship. Since taking over the fund in 2008, it has grown by 158.9 per cent, compared with 42.2 per cent for the FTSE All Share index, though of course there is no guarantee this will continue. The fund's bias towards more cyclical areas of the market, as well as to small and medium-sized companies, does make it volatile. I would suggest investors look to buy the fund on any market dips and I expect those willing to ride out the volatility will be handsomely rewarded.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.ukReuse content