Fund Manager’S Response

I was pleased to discover that David Burren has picked the Old Mutual UK Select Large Cap Fund as his core UK equity fund. It was also interesting to see that he believes that only the best mid-cap managers will make the grade this year. As he has also picked the Old Mutual UK Select Mid Cap Fund, he must hold my colleague Ashton Bradbury in high regard.

I believe that the environment of low interest rates and a lack of inflationary pressure is enabling continued upgrades in economically-sensitive areas, driving the market higher despite negative influences such as dollar weakness, a heightened terrorist threat and the possibility of US protectionist measures. However, upgrades are not across the board and therefore good stock selection is paramount.

My fund currently has four areas of focus. Defensive growth companies have been weak but now look set to outperform. These include telecoms, specifically mobile operators with good economic leverage, and I am overweight Vodafone and mmO2. Resource-based cyclicals are seeing genuine demand and upgrades. Following previous poor performance, the oil sector has shrugged off concerns of dollar weakness and focused instead on the strength of the oil price.

Food, tobacco and pharmaceuticals are growth areas that have performed poorly and I have started to increase exposure in anticipation of improved performance. Domestic banks now look cheap: their loan books are recovering, they have no dollar worries and with the reporting season about to start, they could enjoy a strong rally. As these companies account for almost a quarter of the index, strength in the sector will be positive for the overall market.

In contrast, I am negative on domestic consumer stocks, such as builders, stores and mortgage banks. With further rate hikes on the horizon and very high levels of mortgage lending and consumer borrowing, these areas could come under increasing pressure. I am also underweight in the traditionally defensive area of utilities.

I expect further upside in the coming months and aim to exploit the continued rally through active stock selection within a concentrated portfolio.