Equity prices have surged around the world over the past year and at the time of writing, the FTSE is still above 6,680 points. However, markets have become choppier over the past week, with significant falls followed by sharp rises.
Lees, director of equities at F&C, says the fragility of the rally is down to it being driven by macro-economic factors, and warns that company earnings have not increased in line with equity prices.
"Over the longer term, the data shows us that the breakdown between the drivers of equity markets is typically 70/30 macro/stock, but the recent surge in markets has seen the weights more like 90/10," he said.
"The big difference between this and recent rallies, however, is that this time global equities are being driven higher by the cyclical sectors as investors increasingly believe that growth in the domestic and global economy is on an upward trend."
"At the stock level, little has changed. There has been no major increase in earnings, no significant new product launches and little in the way of management change outside of the mining sector," he said.
"What we have therefore seen is a price/earnings expansion," he added.
Henderson’s Alex Crooke recently told FE Trustnet that although markets have performed well, company earnings have been increasing, making prices fair. However, Lees is not convinced.
"Globally, it is only Germany that has seen market rises driven by increased earnings and in Japan the split has been roughly 50/50 between earnings growth and multiple expansions. This could mean that the rally is fragile," he added.
Lees currently runs two portfolios: the F&C UK Alpha fund and the FCA regulated F&C Enhanced Alpha UK Equity fund.
He has managed the £225.6m F&C UK Alpha fund since September 2008. According to FE Analytics, it has returned 58.35 per cent so far, which means it has underperformed against both the FTSE All Share and the IMA UK All Companies sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
Currently, Lees’ largest sector weightings are to financial and industrial stocks.
He is optimistic about the immediate future of banking stocks but has taken profits from his industrial holdings.
"In the US, financials, industrials and technology have been the best-performing sectors and this is a trend filtering through to the UK and other leading equity markets."
"Indeed, it’s fascinating to observe the change in market sentiment towards RBS," he said.
"A fortnight ago the stock was languishing at 280p and unloved by investors; now the price has risen to 340p and it's the darling of the market."
Since Lees spoke to FE Trustnet, RBS shares have slipped slightly to 329p.
Performance of stock over 1 month
Source: FE Analytics
"In the industrials sector, we have taken some money off the table in both GKN and Weir Group."
"GKN was trimmed after a strong run helped by the successful integration of the Volvo aero engine business into its aerospace division, and a positive set of results."
"Weir Group was trimmed due to reduced capital investment across the resources sector. Even though Weir is more exposed to on-going projects rather than new greenfield investment, we thought it prudent to bank some of the profits."
"In the technology sector we have also trimmed back Arm Holdings, though it is a company we believe has a very strong market position and is one we like from a long-term perspective."
"Elsewhere, video search engine Blinkx has been performing strongly and reported a 73 per cent increase in revenues in their recent results."
The fund’s largest individual holding is the FTSE 100 listed multi-national bank Standard Chartered, which makes up 4.92 per cent of AUM.
However, he says he is reviewing his exposure as the bank’s recent numbers have been disappointing.
"Standard Chartered is a bank we are looking at closely," he said.
"After the recent disappointing results, they did not change their full-year guidance on full-year results and we struggle to see how this will be achieved."
"That said, the company’s shares are cheap relative to HSBC on virtually any measure over the last three to five years."
Overall, the manager says investors with a strict bottom-up approach will come out on top as markets should pull back to normal levels.
"If the consumer staples sector sees a period of weakness, we may well look to add to our holdings as we are currently underweight."
"We intend to remain overweight to consumer cyclicals, for the reasons mentioned earlier, through the likes of WPP, Inchcape and Burberry," he said.
"As correlation levels subside to more normal levels, stockpicking will become a more important driver of stock market performance and is something we very much look forward to," he finished.
F&C UK Alpha has an ongoing charges figure (OCF) of 1.72 per cent and requires a minimum investment of £1,000.
