The manager of the £334m fund says that worries over volatility this year, including a sell-off in early April following a major correction in US tech and biotech stocks, have been overblown.
FE data shows that the UK stock market has had a very mixed start to the year, with positive returns of 0.29 per cent only telling part of the story.
Performance of index in 2014
Source: FE Analytics
Kerr (pictured) is generally optimistic about the outlook for markets, and says he will be using such falls to add to some of the worst hit areas of the market.
“We have had quite a tumultuous time in the market over the last month with some sections of the market being sold off very heavily,” he said.
“The market has seen a set-back as a whole but also a rotation within that; it has been a complete mirror image to the first quarter of 2014.”
“In the first three months everything did really well but recently the stocks with the best price momentum were the worst performers – some of them are down 15-20 per cent.”
“The sell-off was very dramatic in the first half of April and stabilised in the last week, so we are just looking to top up the odd holding very cautiously at the moment because we are not sure whether there is bit more of the downside to come or not.”
“Because it happened so rapidly we haven't really touched the stocks yet but we are looking to selectively top the most oversold ones up where we think they have come back to attractive valuations.”=
Several fund managers and other industry commentators believe the Fed’s decision to taper and raise interest rates in the coming months has prompted the volatility this year. Many have taken money off the table and parked it in cash as a result, but Kerr doesn’t think there is any need to panic.
He says the correction has occurred for two reasons; the overreaching of hedge funds – particularly with regard to tech and biotech stocks – and general profit taking from investors.
“We are concentrating on deciding if it is a permanent rotation and something we need to therefore change in our portfolio. However, looking at the macro picture, nothing has really changed at all,” he explained.
“There are no particular macro catalysts that you could point to that caused the last month or so’s reversal, so we still see the macro picture as relatively unchanged and therefore our positioning remains relatively unchanged.”
“A number of hedge funds got themselves very long in [tech] stocks and when the sell-off came they breached technical levels and they had to de-gear. That caused a snowball effect.”
“We saw the most popular stocks getting savagely sold off and all of the most popular shorts rising. That is not just a market correction where all markets come off – that is hedge funds selling their longs and buying their shorts.”
“To a large degree that is why momentum stocks got hit and the dodgy defensive stocks actually rose.”
Kerr also highlights investors’ natural reaction to take profits after months of positive returns.
“We had an extremely good six months without any setbacks and it came to the time of year when there was going to be low volumes in the two weeks over Easter and heading into the May period, which is traditionally weak,” he said.
“There was just a ground swell of people wanting to take a bit of money off the table and take a bit of profit but if you put the two together it creates quite a sharp move in certain areas of the market.”
“However, I don't think the macro picture has changed and so that is why I think it is healthy market correction.”
The Old Mutual UK Dynamic Equity fund has lost 2.8 per cent in the past month – a greater fall than the IMA UK All Companies sector average, which is down 0.21 per cent. Its benchmark – the FTSE 250 – has lost 0.82 per cent over the same period.
Performance of fund vs sector and benchmark, over 1 month
Source: FE Analytics
Kerr says four out of the fund’s five largest holdings – Ashstead, St James’ Place, Barratt Developments and Persimmon – have all lost money, though he explains he’s been reducing overweight positions in the two house builders this year.
Prior to the past month, the fund has been a top quartile performer over one and three year periods and since its launch in July 2009.
Performance of fund versus sector over 3yrs
Source: FE Analytics
Over three years it has returned 73.30 per cent, beating its benchmark by more than 20 percentages points.