Nickols and Watts have both responded to an improvement in the risk appetite surrounding the UK smaller and mid-cap company sectors by adding a basket of between 10-12 equity positions to their respective portfolios.
Nickols, manager of the Omam £500.8m UK Smaller Companies fund, has added a series of tactical, cheaply rated value stocks from the bottom end of the market cap spectrum.
While appetite is improving, Nickols says that this is still not a “full blown risk on environment” as the stocks represent a deliberate exposure to the rising end of the spectrum through defensive growth picks.
“Its exactly [this] type of stock which has the most to benefit from a re-rating,” he says. (article continues below)
“When we bought Smiths News, it was trading on a PE of around 3.5 to 4. In this environment of improved risk appetite, this can quite easily re-rate to 5-6. Its that order of magnitude of re-rating that we are trying to capture.”
He adds: “Should the data begins to improve, we have the flexibility to begin to focus up some of those units, we can make them bigger and a more meaningful part of the portfolio.”
Among the largest additions are a 1.5% unit in packaging firm DS Smith and 1% in EZ Electronics.
Cyclical names including Phoenix IT, Smith News, Wincanton and TT Group have all been added as much smaller positions.
Reflecting this improved positive sentiment further up the market cap scale, Richard Watts, manager of the £824.7m UK Select Mid Cap fund, has also added 10 equity positions for the first time in “a number of years”.
Watts says: “We took the view that what you don’t want to do is pick 2-3 stocks where it takes you quite a while to build them and then find you’ve missed out because the market has moved against you and you’ve just not had enough exposure.
“My biggest overweight is to the technology theme… IT software and hardware”
“You buy into value themes, high beta names, names that are going to participate in a market rally and put the money to work. Subsequently you then consolidate the number of holdings back down.”
As 10 names were added to the portfolio, Watts elected to remove six positions, meaning that the number of holdings in the portfolio are back down to the same level as they were in January, at about 67.
A position in software providers Invensys has been bought and sold in recent weeks, house builders Taylor Wimpy has made into a larger position and a number of property names were also recently added.
Watts says the fund’s largest exposure is to technology: “My biggest overweight is to the technology theme… IT software and hardware collectively, I’ll be about 5% overweight on that theme so that’s where I get the structural growth.”
The portfolio is also overweight in capital goods, oil services.
Both managers are holding cash levels of 2% and Watts confirms that going forwards, he wants to stay fully invested.
But while the environment is improving, Nickols says there is not enough evidence that things have improved enough to commit to this lower strata of stocks.
“The date is improving. That said, it would probably be rash to conclude that the world is back to normal. A lot of the structural problems that have dogged economies over the past 2-3 years are slowly being addressed but it would be premature to say they have been resolved,” says Nickols.