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Neil Veitch: managers have been burned by consensus plays

Neil Veitch: managers have been burned by consensus plays

SVM manager Neil Veitch (pictured) said the violent rotation out of mid and small cap recovery stocks has harmed many funds in the UK All Companies sector, including his £111 million UK Opportunities fund.

The small and mid cap rally of the last 18 months has come to an abrupt end, with the FTSE 250 falling 1.9% from the start of April to 29 May, compared with a rise of 4.1% on the FTSE 100.

‘What we have seen is quite an aggressive sell-off in many of the over-owned, over-loved mid cap names. They are good businesses but valuations had become extended, particularly in the UK cyclical domestic names, where investors sought exposure to the improving UK outlook,’ he said.

He added this was particularly evident in the ‘poster boys’ of the recovery, such as ITV and Thomas Cook, and across housebuilders more generally.

But one positive about the market shakedown, Veitch argued, is that the market is becoming more of a stock-picker’s environment, where managers cannot outperform the FTSE All Share simply by having exposure to mid caps.

‘I think a lot of funds have been masquerading as growth at a reasonable price, but it was momentum,’ Veitch said.

In April, UK Opportunities was down by 0.4% compared with a 2.2% gain for the FTSE All Share, and he said this was down to his portfolio positioning.

‘We have suffered slightly through this market rotation, but that reflects the fact we are stock-pickers with a bias to small and mid caps,’ Veitch said, noting his portfolio has only 50% exposure to large caps compared to the average index exposure of 75%.

Despite the recent outperformance of larger companies, the fund has reduced its large cap exposure down from 60% Veitch said, because stocks such as Aberdeen Asset Management, St James’s Place and International Airline Group were sold after hitting their price targets, prompting him to put more money into small IPOs.

These include plastic pipe manufacturer Polypipe, and Manx Telecom, which Veitch felt offered top line growth of low to mid single-digits at an attractive price. But in general, he argued recent IPOs have failed to offer a compelling risk- return ratio and the market’s lacklustre response to them was down to ‘deal fatigue’.

‘Fund managers are inundated with new issues. Earlier on we saw more attractive businesses at more attractive valuations and money coming into equities. I don’t think valuations are as good as they were, or as high quality.’

In the year to the end of April, the SVM UK Opportunities fund has returned 18.2%, compared with 10.5% by the FTSE All Share Index, while over three years it has returned 37.3% compared with 27.6% from the index.

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