Lawson, co-manager of the £116m SVM UK Growth fund alongside Colin McLean, is taking a bearish stance on the next phase of the UK’s domestic recovery and is less positive on domestic-facing companies that have recently been re-rated. She is looking to incorporate several different strategies in her fund, which includes increasing her mega cap and emerging market exposure.
“This portfolio has been very domestically focused, but playing the domestic recovery through the consumer angle was very much the story in 2013,” she said.
“It’s not clear where to go from here which is why I’m adopting a bearish strategy across the portfolio. There needs to be a lot of strategies working together, playing lots of different stories.”
“We’ve had a very good year last year and this year but things are going to be harder.”
“The markets have run hard. I’m not predicting Armageddon for UK stocks but for the recovery to be sustainable it’s got to broaden out.”
Lawson has had a strong small to mid-cap bias in her SVM fund, which has benefited her fund significantly in recent years. FE data shows her fund has returned 53.43 per cent over a three year period, compared to 34.63 per cent from the IMA UK All Companies sector average and 28.02 per cent from the FTSE All Share.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
However, in the last few weeks Lawson says she has been moving her portfolio up the market cap spectrum to the upper end of mid cap market. The manager has also been trimming her small cap holdings to avoid liquidity issues in the face of a possible market correction.
Lawson is also looking for an entry point into emerging markets, which she sees as a good diversifier away from UK domestic stocks, which she believes in many cases are pricing in unrealistic earnings growth.
Whilst not holding any emerging market-facing companies yet, she is interested in adding asset manager Aberdeen and financial services group Prudential, as well as brewer SAB Miller, and is considering large cap miners as well.
She says mining and oil gas stocks are looking cheapest at the moment and although she hasn’t bought any yet, is looking to dip her toe back in as a way of buying cheap emerging market exposure.
Mining stocks have been out of favour for some time, with worries over slowing growth in China as a particularly worrying headwind. However a number of managers have been upping their exposure to the sector because of changes in management and ultra-low valuations.
Lawson says there are margins of safety in quality companies like Rio Tinto and BHP Billiton because they are at such heavy discounts.
“I’m not interested in the highly leveraged stocks in questionable geographical areas. The best way to play it is through the likes of Rio Tinto and BHP Billiton,” she said.
“The market is saying the margins are never going to normalise, but I think they will.”
Both stocks are down more than 16 per cent over three years, according to data from FE Analytics.
Performance of stocks over 3yrs
Source: FE Analytics
Despite her view on the potential opportunities in emerging markets and a slowing UK, Lawson says she doesn’t expect to see a wholesale move out of domestic stocks and into emerging markets in the short-term.
She says there are still UK stocks that look attractive, but she is judging them on a stock by stock basis rather than by sector.
Another FE Alpha Manager, Steve Russell, who co-manages the CF Ruffer Total Return fund, has also been trimming domestic stocks less geared towards the business cycle in recent months for similar reasons to Lawson.
“We have been progressively selling down ‘nifty fifty’ defensive stocks, shifting into what we deem to be lower risk businesses with less downside risk. Shell falls into that category – we like the fact that management is getting the message that capital discipline is a good idea,” he said.
“BP has led the way in this respect and we have a very high regard for them. They are converting reserve growth to cash flow in a very serious way, but at the moment this is being masked by the Macondo settlement. Shell is following suit.”