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UK the place to be, says Jupiter Merlin team

07 October 2013

The Government’s Help to Buy scheme will boost the property sector and have a knock-on effect on the rest of the economy, according to Algy Smith-Maxwell.

By Thomas McMahon,

Senior Reporter, FE Trustnet

Investors should be upping their weighting to the UK market, according to FE Alpha Manager Algy Smith-Maxwell of the Jupiter Merlin range, although he says they need to take care in the expensive mid cap space. ALT_TAG

Smith Maxwell says he and his co-managers on the multi-manager range have upped their weighting to the UK in the £1.88bn Jupiter Merlin Growth portfolio.

The UK market should be buoyant in the medium-term on the back of the Government’s actions to stimulate the housing market, he says.

"I think the Conservative Party have loaded the gun to try and get re-elected next time around," he said. "They are essentially pumping up the property market and the feel-good factor that has in the UK economy."

"The stock market remains an attractive place to be invested in (for sterling investors) – the least bad place to be, I think, is in UK equities. It’s a sensible place to be at this point in the cycle."

However, the manager, who also runs the Balanced, Conservative, Income and Worldwide portfolios in the same range, says that he is concerned about the how expensive the UK mid cap sector has become.

Investors need to be very selective in the managers they use in this part of the market, as there is a much better outlook for some companies than for others.

"Some of the UK mid cap stocks are getting pretty expensive and they have been re-rated, which is fine, but you just need companies to come back and tell the market they are seeing earnings growth," he said.

"For a number of mid cap companies in the UK it will come through and analysts are behind in their expectations, but there are lots of other companies that are fully valued."

The manager says that even if the market is expensive, some areas justify the valuations because of their better prospects.

"There are a number of analysts out there who think UK mid caps are the most over-priced in the developed world," he said.

"I can see there are stocks within indices which are further ahead from the analysts who are behind the curve."

Jupiter Merlin Growth has returned 12.26 per cent over the past year, slightly behind the 12.44 per cent made by the IMA Flexible Investment sector average.

Performance of fund vs sector over 1yr


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Source: FE Analytics

The sector contains disparate strategies, making it questionable how useful such a comparison is, but the underperformance is in line with the other strategies in the Jupiter Merlin range.

Its funds have struggled recently thanks to a high weighting to emerging market equities and debt, as FE Trustnet reported last week.


Smith-Maxwell says that within the growth fund, the team is using Julie Dean’s Cazenove UK Opportunities and Nigel Thomas’s Axa Framlington UK Select Opportunities to access UK mid caps.

Both funds use a multi-cap strategy: Cazenove UK Opportunities has 42.3 per cent in mid caps and 53.4 per cent in large caps, versus the 14.2 per cent and 83.3 per cent of the All Share.

Thomas has 34.17 per cent in the FTSE 250 and 56.83 per cent in the FTSE 100.

The Cazenove fund has been more successful in the short-term, making 35.22 per cent over one year while the Axa fund has made 19.12 per cent. The FTSE All Share has made 16.95 per cent. Dean’s fund has also outperformed over three years.

Performance of funds vs index over 1yr


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Source: FE Analytics

Smith-Maxwell says he thinks the recovery in the financial sector has further to run.

"One of the interesting sectors is financials, and that’s a sector which is recovering and looking on a price/book basis like there are some opportunities there," he said.

Dean’s fund is overweight financials, while Thomas’s remains significantly underweight.

Smith-Maxwell acknowledges that M&A activity has been slow to pick up, but that this seems to be changing.

"The sceptics among the managers say we have not had much M&A activity, which would enable the UK mid cap index to continue to surprise and remain expensive," he said.

FE Trustnet recently reported that a number of managers were seeing takeovers pick up at the smaller end of the market.

Smith-Maxwell says that he is more wary of the US market, where valuations seem excessive.

"The US small and mid caps are on 17 times earnings, having seen multiple expansion rather than earnings growth," he said. "We now need to see some earnings growth come through in the US."

The manager says that one major headwind for investors is the lack of certainty over when the US will begin to end its quantitative easing programme and raise rates.

Having gone back on his original intention, Ben Bernanke has ruined the bank’s credibility, he says.

"Central bankers in the developed markets have been trying to provide clarity to markets – Carney is a great example, as is Bernanke," he said.


"The problem is that we as investors are consumers of that clarity and wanted certainty. The Fed has lost a lot of credibility with the market because they have taken away any suggestion of certainty going forward."

"The markets were led to believe QE was to be tapered and they have turned on their hindquarters, so that’s where we are right now."

"When Bernanke was effectively sacked on TV by Obama I thought 'Oh my God'. He’s likely to resent being sacked on TV, and it almost seems like he has tried to show Obama he has got the hand on the tiller."

"There’s an economic logic in the policy, but to tell the markets you are going to do something and then not do it is quite extraordinary to me."

"I think he made a big mistake in trying to tell the market what he wanted to do and then not do anything – he could have done $5bn or something nominal at least, but he didn’t do a dollar."

Jupiter Merlin Growth has ongoing charges of 2.56 per cent and requires a minimum initial investment of £500.
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