Strong cashflow is key to growth

Oil prices continue to dominate the global economic environment, reaching record levels in September at over $50 per barrel. Higher prices caused concern over corporate profit margins, and this – combined with ongoing concerns regarding the strength of the global recovery – dampened equity markets. Despite this, the Federal Reserve upgraded its view of the economy and played down fears of inflation.

The average return from all funds was 2.34% in September, following on from a 1.64% gain in August. Much of the September gains came from Global Emerging Markets funds, which rose 5.82%. North American Smaller Companies and Specialist funds also saw some healthy gains, rising 4.8% and 4.7% respectively. The IMA North American Smaller Companies sector was pushed up by Merrill Lynch American
Opportunities, which gained 8.05% due to some astute stock selection and an overweight position in the energy sector.

UK equity funds fell behind European-invested funds in the tables, with UK Smaller Companies posting a gain of 3.08% and UK All
Companies 2.94% (11th and 12th in the sector table). Interestingly, analysis of asset growth in UK equity funds in the last three years shows that despite the FTSE All-Share falling 3.8% (since end Sept 2001), assets have risen 3.1%, whereas foreign-invested equity assets have fallen on average 9.68% over the same period.

Global Growth funds gained 2.45% in September, placing the sector in 15th position. Strengthening returns in Europe and some Asian countries resulted in the sector moving up the rankings from 21st place in July and August.

First State Global Opportunities is again the best-performing fund.

The fund gained 6.78% for the month and benefited from a zero holding in Japanese equities, which performed poorly. The fund is extremely overweight in Asia ex Japan (40.50% against the sector average of 7.1%).

The fund with the largest movement in allocations was Old Mutual Worldwide Select Equity, which moved an additional 11.70% into North America, resulting in a heavy overweight position of 45.30%. This was at the expense of Asian assets, with a 6% deduction in Japan holdings and a 5.3% deduction in Far East ex Japan holdings.

Geographical allocation in an investor’s portfolio is vital and is a strong determinant of performance where the imbalances between equity markets in differing economies are significant. Finding companies with strong cashflow is key, as outperformance has become
increasingly dependent on the return of shareholder value via dividend growth.

BRIAN HARVEY
UK head of research at Lipper