Royal London Asset Management fund manager Derek Mitchell admits it is hard work trying to find attractive opportunities within the UK mid cap space.
Mitchell, who manages the £170m RLAM UK Mid Growth fund, blames a recovering UK economy and a market anticipation of this but thinks the ‘hunt for yield’ was a 2012 phenomenon for investors.
The FTSE 250 rose by more than 25 per cent over the course of 2012, according to FE Analytics, and has added about another 24 per cent during 2013 so far.
With companies in the mid cap space growing and benefitting from recovering economy, Mitchell says rising valuations have made it trickier to find opportunities at a good price.
Mitchell says: “They have all done terrifically well and the mid cap has done better because it is more cyclical.
“There are less and less opportunities. The questions remains from a valuation perspective, a lot of these companies are looking to devalue.
”However given the improving economic outlook we should begin to anticipate earnings upgrades coming through and that is one of the current missing pieces in the jigsaw.”
Mitchell, who instantly sells out of a company once it becomes large cap or accepted into the FTSE 100, claims the challenge comes in the shape of replacing a sold holding.
Mitchell adds: “It is becoming trickier to find somewhere to spend the profits, especially as I am always fully invested.”
For instance, in June 2013 two of Mitchell’s holdings – Travis Perkins and Persimmon – were promoted to the FTSE 100 and consequently sold, replaced by Howden and Taylor Wimpey.
Looking for areas where there is still some “lag”, Mitchell is hesitant to go to the “beaten up areas” of the market – mining and oils. And he is still looking for growth stocks, undeterred by the popularity of income and yield products.
Mitchell says: “I think the hunt for yield was last year, partly because it was defensive. We are in a narrow window at the moment when yield is less important.”