Fund In Focus

Perplexing times in world markets

AMID the doom and gloom in which the economy remains enveloped, the FTSE's durability has been largely overlooked. While equities remain volatile, the market is reacting well to any positive news and the expected plunge has yet to materialise. But David Stevenson, lead manager of the Edinburgh-based £107 million Resolution Cartesian UK Opportunities fund, admits the conditions for portfolio building are difficult, if not perplexing.

"Over the last six months to a year, we've taken a strong top-down view, sticking to individual stocks and not making macro-economic calls. But we're increasingly nervous about the UK outlook so the portfolio has grown more defensive," said Stevenson.

Part of the problem for managers is that markets aren't reacting as they're expected to, he added. "There's no real prospect of the problems we've encountered since last summer going away and the environment remains extremely toxic. But the FTSE is still around the 6,000 mark and we're scratching our heads over that, because, while a handful of sectors are offering positive returns, the rest are under water."

The fund, launched in December 2005 by Stevenson and his co-manager Andrew Kelly in conjunction with Resolution Asset Management, is currently ranked 256th of 355 funds in the UK All Companies sector over one year. But the managers are sticking to their policy of avoiding sector classifications and focusing on sustainable longer-term growth. "Our themes are outsourcing, core government spending, consumer necessities and infrastructure. We face the prospect over the next year at least of consumer spending slowing further, government spending perhaps squeezed, so making it very hard for corporates to grow."

These conditions increase the incentives for companies to contract operations out, as they did in the 2001-3 slump, hence the fund's largest holding is outsourcing specialist Serco. Other large holdings include utilities such as National Grid and Centrica.

Whatever the sector, the priority is finding attractive stocks that have earnings visibility, financial strength and decent cashflow and balance sheets.

While many investors continue to view emerging markets as a panacea for the problems of the developed world, Stevenson is more sceptical. "We find it hard to reconcile the belief in emerging markets growth that people see carrying the economy." he said. "The stock-market in China is already down 40 per cent this year and inflation is in the high single digits so it's dangerous to assume China will carry global growth."