Investors need to shift into financials to take advantage of the next stage of the economic recovery, according to FE Alpha Manager Leigh Himsworth
of the £50m City Financial UK Select Opportunities
says that with the uncertainty surrounding the future of the stimulus plans that are supporting share prices, the direction of markets cannot be easily predicted.
However, rather than following the crowd into the debt-laden stocks that have led the rally, he favours selectively raising exposure to the financial sector.
"If the stimulus remains, then portfolios should remain unchanged," he said. "I do, however, think we have entered a phase where there is upward pressure on bond yields and as such our portfolios should be adjusted slightly – more geared towards financials. One of the better ways to play this change is through banks and life assurance stocks."
Data from FE Analytics
shows that Himsworth has been steadily increasing his weighting to the sector since the start of the year.
He had 15.8 per cent of his fund in the sector in January and the figure has now reached 26 per cent. This makes it easily the biggest weighting in the fund – industrials are second, at 19.3 per cent.
The fund's two largest holdings are Lloyds and Legal & General, at 3.7 per cent and 2.9 per cent of the portfolio, respectively.
data shows the fund has managed to outperform both its sector and the market, taken as the FTSE All Share, in the year-to-date, despite significantly underperforming in rallies.
Performance of fund vs sector and index in 2013
Source: FE Analytics
The fund has made 20.21 per cent in 2013 while the FTSE All Share has made 13.54 per cent and the average IMA UK All Companies fund 16.19 per cent.
It is noticeable that the fund did not follow the market up in its spike over the summer and did not suffer the fall afterwards, yet has still come out on top.
"The underperformance was due to a brief period of market euphoria in April," Himsworth said.
"When markets jump upwards for no apparent reason other than generally excited investors chasing prices ever higher, then I always lose ground as leadership tends to fall to the highly indebted speculative stocks."
"Since the recent sell-off in May, we have recovered much of this as the performance has been more stock-specific and news-flow related rather than a general rise."
Himsworth explains that investors need to be hedging their bets as to the future direction of the UK market given the uncertainty surrounding the return of confidence and government policy.
"Yes, there are some signs that we may have passed the worst in terms of the downturn, and while the numbers for GDP, unemployment and so on are not startling, the most important thing in a recovery is a return of confidence, which in turn promotes investment."
"For me, it is the levels of private investment that are key. We have been through a four- or five-year period where the only investor of any note has been the Government, hence the massive jumps in the level of Government debt."
"Whilst this has been essential in my view for the economy to recover, we need the private sector to pick up the baton."
"Given this has not happened for so long when interest rates have been at historic lows simply means that confidence has simply not existed and that these elements have been repairing their own balance sheets."
"I think barring any huge policy mis-hap or some surprise event, perhaps Middle East-related, then recovery should continue, but I still think it is best to plan for a very steady level of activity in the 0.5 to 1 per cent ball-park for GDP."
Himsworth reiterates the point that monetary policy is key to confidence and the future direction of markets.
"If we enter a phase where the authorities do highlight the need to reduce monetary stimulus and bond yields rise more strongly, then the markets will suffer in the run to the end of this year," he said.
"If, however, growth falters and markets become content, that stimulus will remain and markets should perform well into the year-end."
The manager’s fund has outperformed its peers and index since launch in September 2011, making 43.67 per cent compared with the sector average of 33.75 per cent. The FTSE All Share has made 21.52 per cent over that time.
Performance of fund vs sector and index since Sep 2011
Source: FE Analytics
The manager says that he has also been increasing his weighting to oil producers in the light of crises in Egypt and Syria.
City Financial UK Select Opportunities has ongoing charges of 2.31 per cent and requires a minimum initial investment of £1,000.
It does not yet have a track record long enough to have a crown ranking, but Himsworth has won FE Alpha Manager status in a career that has taken in spells running UK equity funds at Franklin and Gartmore.
Performance of manager and peers over 10yrs
Source: FE Analytics
Over 10 years he has made 226.05 per cent, more than double the 107.51 per cent from his peer group composite.