Himsworth (pictured), who manages the City Financial UK Select Opportunities fund, is somewhat of an expert on small and mid caps, having previously run Franklin UK Mid Cap and Royal London UK Mid Cap Growth for around a decade earlier in his career. His current fund has typically had a significant weighting to the FTSE 250 and FTSE Small Cap indices, but he thinks the general consensus that these are the best places to be for growth right now could be dangerous.
"From the recent upward moves in markets, there is clearly an expectation that the next ‘surprise’ news flow will be positive," he explained.
"Due to this, investors are loading up with risk assets in their portfolios and investing further down the market cap spectrum into more mid and small cap stocks, hence why these indices are leading yet again."
Performance of indices over 1yr
Source: FE Analytics
According to FE data, both the FTSE Small Cap and FTSE 250 indices have outstripped the wider FTSE All Share over the last 12 months, with returns of 32.08 and 25.81 per cent, respectively.
Himsworth's fund has benefited from this trend, thanks to his overweight in small and mid caps. City Financial UK Select Opportunities, which had as much as 70 per cent in these areas as recently as September this year, has returned almost 10 percentage points more than its All Share benchmark over the past 12 months, and is also well ahead over one, three and six months.
However, he thinks the time has come to take profits and look to large caps, which are now more attractively valued on a relative basis.
"Very recently we have been trimming [our exposure to small and mid caps] due to excess performance – not necessarily supported by earnings upgrades, but perhaps simply down to technical over-buying, with too many investors wanting to play this market," he explained.
The manager has recently been buying Lloyds Bank and Legal & General as an alternative way to play rising bond yields. Mining company Rio Tinto, which has had a poor 12 months, is also a top-10 holding.
On a more general note, the manager says he is a little wary of the recovery taking place in the UK, which has been the principal driver of the UK domestic market – and most notably small and mid caps – in the last year or so.
He says the next step of the recovery could result in a sustained period of uncertainty and volatility in the markets, which could hit small and mid caps particularly hard, given that it has been them that have benefited most so far.
"I remain cautious about the mechanics of recovery and moving the dials back to any sort of normality, as this may cause extraordinary levels of stress in the markets," he explained.
"My quandary is: what is the norm? Is it what we believe used to exist prior to 2008 or is it the years since? Perhaps we are in the new norm."
That said, the manager is not quite ready to sound the panic alarm quite yet, given that the market remains relatively sanguine about the end of quantitative easing and the US government shutdown.
For this reason, he thinks it makes sense to stay fully invested, and is waiting for a clear leading indicator before he runs for the hills.
With regard to the US deadlock on an increase in the debt ceiling, he said: "The recent market reaction, or lack of, makes me think that if no-one else is worried about this debt, why should we be?"
"Ultimately, it must be down to confidence. Investors presently believe that the authorities remain in control and will simply print money to meet governmental or bond financing requirements."
"It is a change of confidence that we have to look out for. For me, this is where we take our lead from the US 10-year bond yield: this will dictate what happens. For the time being, strap yourself in and join the madness."
Himsworth’s City Financial UK Select Opportunities fund has been a top-quartile performer since its launch in September 2011, with returns of 48.56 per cent. The fund has been more volatile than both its IMA UK All Companies sector average and FTSE All Share benchmark, however.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund requires a minimum investment of £1,000 and has ongoing charges of 2.31 per cent.
On a long-term basis, the manager has a proven track record of beating his rivals. FE data shows Himsworth has returned 237.38 per cent over 10 years, putting him more than 100 percentage points ahead of his peer group composite.
Performance of manager and peers over 10yrs
Source: FE Analytics
As well as the mid cap funds mentioned earlier, Himsworth managed a number of funds at Gartmore. He has recently taken charge of the EFA OPM UK Equity and EFA OPM Equity High Income funds.
