FTSE 250 hits record high…but Neptune’s mid cap manager shuns outperforming stocks

The FTSE 250 has reached an all-time high, up 1.1 per cent in early afternoon trading at 19,573.

The index of mostly UK-focused stocks has outperformed the FTSE 100 year to date, rising 8.2 per cent compared to the 1.3 per cent climb of the blue chip index.

However, Neptune’s Mark Martin, head of UK equities and manager of the £598m UK Mid Cap fund, is mostly avoiding the outperforming domestically-focused names in favour of companies with greater global exposure.

“The more domestically-focused FTSE 250 has significantly outperformed the FTSE 100 since the announcement, and is now ahead by more than 7 percentage points in 2017…There was initially a lot of indiscriminate selling of small and medium-sized companies after the vote for Brexit last June, which we have started to see reverse in recent months.”

While sterling has rallied and domestic cyclicals have recovered following Theresa May’s shock election announcement – on the expectation of a Conservative win – Martin doesn’t think sterling will rise much further.

“While the UK economy remains in good shape, we do not believe that sterling is likely to strengthen significantly from here, and continue to have concerns over the risk/reward in domestic cyclicals,” he says.

“The only way we see sterling strengthening significantly from here is if the Prime Minister is able to maintain the UK’s position in the single market. This seems highly unlikely given the hard-line stance of EU leaders, who have repeatedly emphasised that they will not allow the UK to have freedom of trade without consenting to the free movement of labour,” Martin adds.

With signs that the UK economy is slowing, Martin has been increasing the fund’s exposure to internationally-facing UK mid caps while generally avoiding domestic cylicals – notably housebuilders – which he says are expensive.

“We therefore retain our preference for internationally facing UK mid cap companies, many of which have yet to benefit from sterling weakness since the Brexit vote. We have taken the opportunity to top up positions in some of these companies since Theresa May’s announcement, and remain optimistic about their potential to generate attractive returns on a medium to long-term view.”