Although positive on the UK economy, SVM fund manager Neil Veitch continues to put stocks with good businesses ahead of domestic cyclical plays.
The manager of the £91.4m SVM UK Opportunities fund says his optimism surrounding the UK and global economy has prompted a general move out of defensive stocks, including GlaxoSmithKline and Centrica, into more cyclical areas of the market.
However Veitch says he would not buy a stock simply because it is considered a typical cyclical play on the UK recovery, focusing instead on good businesses.
He says: “It is an all too easy narrative that when the outlook for the UK economy improves you focus on domestic cyclical-type plays.
“Historically we have been more positive than consensus on the UK economy but does that mean I want to run out a buy a bad business that is exposed to the UK economy? No. I just look for good businesses that are appropriately priced.”
Veitch highlights certain holdings in his portfolio that may seem cyclical plays, but were in fact chosen for their strong businesses. He says: “We have Sports Direct and William Hill, which is one of our biggest holdings.
“However we hold them because they are fundamentally good businesses that are appropriately priced, as opposed to them being plays on the recovering domestic economy.”
Veitch highlights that Sports Direct was both “mispriced” and “misunderstood” by the market, following an initial drop in share price when the company first floated.
Sports Direct was first bought for the fund at approximately £2 per share, having already bounced back from a low of 30p per share that has since recovered further to reach around £5.25 per share, says Veitch.
Elsewhere, Veitch is unsure of another popular domestic trend relating to the UK housebuilders, where valuations are already “full” based on potentially over-optimistic forecasts.
He says: “The fundamentals for the property market are getting better, but the stockmarket has largely discounted this bright outlook, which may well come to fruition, but if they are wrong in their belief then the risk reward looks unattractive.”
The fund’s holding in Howden Joinery was also recently sold after its share price almost doubled over the last 12 to 18 months as a result of its links with the housing market.
Veitch prefers accessing the potential strength of the UK housing market through his holding in Lloyds, which he says, “is not priced for a recovery in the UK housing market”.