Chris Burvill, manager of the Gartmore Cautious Managed and Equity Income funds, believes inflation may be a bigger risk than consensus economic forecasts suggest, and some indicators have already started to reflect this. Burvill, who took over the funds a year ago, says that an inflation rise of 1-2% would not be a disaster, but would represent a significant rise compared with existing levels. He adds: “We have to be aware that this isn’t really the highest -quality recovery. It has been manufactured through artificially low interest rates. The consensus view is that the risk is a lurch downwards. But why is inflation not being talked about?” However, Burvill says that valuations remain the strongest argument for UK equities. He adds: “Equity valuations are still attractive and there is quite a bit of value in the FTSE 100. There are 13 stocks yielding more than gilts and a third of the index yields more than an average bank account.” Bonds do not represent an attractive alternative to income-producing equities at the moment and the Cautious Managed fund is currently underweight. Burvill says the Parmalat scandal has shown that bonds are not risk-free assets. He is also encouraged by companies such as BSkyB and ARM Holdings, which have started to pay dividends. He believes existing dividend levels are secure, following £3bn of cuts last year. Burvill is cautious on the mid-cap end of the market. He says: “We have to be more selective in the mid-cap area. It has priced in a recovery. It now has to produce that recovery just to maintain this position. The value has to lie in larger-caps.” Favoured sectors in the fund include media and financials. Burvill believes the media sector could have 15-16% dividend growth this year, given the current speed of recovery. In financials, he says the life sector is now reflecting renewed confidence. He does not like utilities, saying that they were overbought last year. He is equally pessimistic on commodities and property: “Commodities are largely played out from an investment viewpoint. China is overheating itself. The hedge funds and speculators will all want to get out when the story changes.” He adds that housebuilders are still making too much money for this stage in the cycle and that profits appear to be of a speculative nature.