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Look to UK mid caps for growth and EM exposure
by James Phillipps on Jun 22, 2011 at 10:16
Consensus currently suggests that investors should stick with traditional defensive blue chip stocks due to the numerous economic headwinds that continue to buffet the stock market.
Strong cash flow generation, overseas earnings and dividends have been the watchwords in recent months and after two years of underperformance from the likes of pharmaceuticals and tobacco companies, these sectors have delivered strongly in the last couple of months.
But by solely focusing on the very largest companies, many fund managers believe that investors are missing a trick as there are equally and arguably even more attractive opportunities further down the market cap spectrum.
Richard Watts, manager of the £938.1 million Old Mutual UK Select Mid Cap fund, points out that while investors tend to focus on the oft-quoted statistic that around 70% of the FTSE 100’s earnings are generated overseas, most tend to overlook the fact that similar can be said of the FTSE Mid 250 index.
‘Just shy of 60% of the benchmark is international turnover,’ Watt says. ‘The UK mid cap market is far more internationally orientated than is perceived. We are overweight international earners by around 10% of our invested assets.’
‘You can get very good exposure and the fund is a pretty strong play on the global economy.’
‘While the UK’s prospects remain uncertain we took the view that very few investors were recognising the global scope of many British companies,’ he says. ‘Many of our companies manufacture high value specialist products and are benefiting from the surge in demand from countries such as India and China. In general, we have a bias towards industrial and business services that will benefit from the continued growth in emerging markets.’
Watts points to Croda International as an example of a UK mid cap global industrial that he is favouring. It manufactures specialist chemical products, such as polymers, inks and pharmaceutical excipients.
‘We have liked it for a while,’ he says. ‘Croda is a play on global economic growth but it also has a structural growth dynamic. It has strong pricing power, a lot of emerging market exposure- all the key ingredients.’
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