The manager of the £400m long/short fund, which sits in IMA Targeted Absolute Return sector, is winding up short positions in expectation of a stronger performance from UK equities.
Markets have faltered this year, switching between periods of falls and rallies.
While global risks are plentiful, ranging from Ebola to conflict in the Middle East to a worsening of the eurozone economy, UK markets did not materially sell off until September and now seem to be on the path to recovery.
According to FE Analytics, UK and European stocks are slightly down on the year while the S&P 500 has gained almost 15 per cent.
Performance of indices in 2014
Source: FE Analytics
The cries of the FTSE 100 hitting 7,000 points from industry bulls such as Old Mutual Global Investors’ Richard Buxton seem far off but Newman says a further rally in UK stocks is around the corner.
He says sentiment around the two primary causes of market wobbles – strong sterling and a weak oil price – looks set to reverse.
In the case of sterling this means a period of prolonged weakness in the pounds, boosting dollar earnings after their conversion to sterling.
A low oil price is being both reinterpreted as positive by the market and set to boost consumer demand in goods and services correlated to fuel prices.
“The strength of sterling was a huge headwind for companies reporting in pounds and repatriating their earnings,” he said.
“However, over the past few months – which really began with the Scottish independence referendum and stronger US macro data - we have seen a huge fall in dollar/sterling.”
“Companies like Burberry, GKN and GlaxoSmithKline are starting to talk about a currency upgrade of four to five per cent.”
Newman says with markets still relatively flat, if not down on the year, this is a tailwind that will be highly significant for company earnings but probably won’t be felt by other markets, particularly not the US.
Looking at oil, the manager said: “The fall-off in the oil price was one reason for the market to fall off recently. Investors were worried it signalled demand destruction but they are coming to realise it is a supply-side issue. OPEC appears to be keeping production levels high. We are also seeing production increase in the US from alternative sources.”
Oil has taken a nosedive in recent months to the surprise of markets, which expected a shock spilling over from the conflict in Iraq to push up the price. It has plunged almost 25 per cent from June.
Performance of index over 6 months
Source: FE Analytics
Newman is responding by getting ready to remove short positons in oil majors such as BP and Royal Dutch Shell and also increasing long positions in airlines and travel firms such as British Airways parent group IAG, travel agents TUI and cruise operator Carnival, which he says will all be set to benefit.
“What all those companies have in common is that the fuel price is a fundamental on their cost base. The other implication is the consumer.”
“When you look at consumer spending patterns nearly 20 per cent goes on fuel and gas for cars but we haven’t seen lower petrol prices on forecourts. But today you have seen politicians to ask firms to pass on savings to consumers. A falling fuel price could have a hugely positive effect on consumer spending.”
Chelsea’s Darius McDermott says Newman and co-manager Ben Wallace have proven their stock-picking abilities by producing robust returns from both their long and short books.
He said in a recent FE Trustnet article he was holding the fund in his personal pension because of the managers’ ability to generate equity-like returns with less volatility.
“It’s one of my favourite funds,” McDermott said.
“There are a number of different funds in the absolute return sector. Some of them are very defensive and try to generate a small positive return and there are others which try and deliver a higher level of returns. I would put Luke and Ben in the latter category and they are the best I have come across.”
The fund is top quartile over three years with returns of 23.62 per cent, more than double the sector average.
Performance of fund and sector over 3yrs
Source: FE Analytics
It has an ongoing charges figure of 1.07 per cent.
